The Issue The central issue in this case is whether the Respondent is guilty of the violations alleged in the Administrative Complaint and, if so, what penalty should be imposed.
Findings Of Fact Based upon the testimony of the witnesses and the documentary evidence received at the hearing, I make the following findings of fact: At all times material to allegations of the Administrative Complaint, Respondent, William John Harnett, has been licensed or been qualified for licensure as an insurance agent in the State of Florida. Respondent currently holds licenses for service lines insurance, debit insurance, ordinary life and health insurance, and general lines insurance (which is property, casualty, or surety). The Department is charged with the administration of Chapter 626, Florida Statutes. On December 15, 1975, the Department was appointed to serve as Receiver of Southern American Fire Insurance Company (Southern) . The purpose of this receivership was to seek the rehabilitation of the insurance company. On February 10, 1976, Southern was determined to be insolvent pursuant to Section 631.011(3), Florida Statutes and the Department, as Receiver, obtained an Order of Liquidation. The Department was charged with the responsibility of marshalling the company's assets in order to settle the outstanding claims against it. To this end, the Department filed civil suits against insurance agents and agencies which had allegedly failed to remit premium monies owed to Southern. One such suit was against Harnett, Inc., Respondent, and other individuals associated with Harnett, Inc. From April 9, 1947 until November 14, 1986, Harnett, Inc. was a corporation organized under the laws of the State of Florida whose general business was insurance. Respondent served as the treasurer and a director for Harnett, Inc. Respondent was authorized to and did sign checks and correspondence on behalf of Harnett, Inc. The Department's civil suit against Harnett, Inc. (Case No. 76-23143) was filed in Dade County on July 26, 1976. This suit claimed Harnett, Inc. had failed to remit premium monies owed to Southern and that Respondent, as an officer and director of Harnett, Inc. having direct supervision or control over individuals acting on behalf of Harnett, Inc., was personally liable for the amounts owed. On March 6, 1981, a final judgment (Case No. 76-23143) was entered in favor of the Department as Receiver of Southern. This judgment found against Respondent and Harnett, Inc., jointly and severally, in the sum of $78,617.85. This judgment was affirmed on appeal. 1/ The Department has attempted to collect the funds awarded in this judgment. From October 26, 1962 until November 14, 1986, Franklin Insurance Agency of Miami, Inc. (Franklin) was a corporation organized under the laws of the State of Florida. At all times material to this cause, Respondent was president and a director of Franklin. On October 20, 1976, the Department as Receiver of Southern filed a civil suit against Respondent and Franklin. This suit (Case No. 76-32799) claimed monies were owed to Southern for premiums Franklin had failed td remit. Further, the suit alleged that Respondent, as Franklin's president and director, was personally liable for the refusal and continued refusal of Franklin to pay the premiums. A final judgment was entered for the Department as Receiver of Southern in the Franklin suit on December 9, 1980. This judgment (case No. 76- 32799) provided for recovery against Franklin and Respondent, jointly and severally, in the sum of $35,983.39. The Department has attempted to collect the funds awarded in this judgment. Gables Insurance Agency, Inc. (Gables), organized on November 28, 1967, continues as an active corporation in this state. At all times material to the allegations in the Administrative Complaint, Respondent was the sole officer and director for Gables. Norfolk & Dedham Mutual Fire Insurance Company, Inc. (Norfolk) entered into Agency Agreements with Gables and Harnett, Inc. on February 1, 1976. Subsequently, Norfolk sued Harnett, Inc. (Case No. 84-03815) and Gables (Case No. 84-03816) for premium monies it was claimed to be owed. These suits resulted in final judgments in favor of Norfolk. The suit against Harnett, Inc. (Case No. 84-02815) found the sum of $54,556.00 was owed to Norfolk. The suit against Gables (Case No. 84-03816) found the sum of $18,843.20 was owed to Norfolk. The four judgments identified herein (paragraphs 8, 11, 14 and 15) total $188,000.44 and remain unsatisfied. These judgments represent money damages owed for unpaid insurance premiums. An applicant for licensure with outstanding judgments incurred during the course of doing the business of insurance would not be approved by the Department without a showing of restitution or rehabilitation. The Department deems such an applicant to be untrustworthy, incompetent, and not fit to become qualified and licensed in Florida. Respondent offered no evidence of restitution or rehabilitation. Respondent maintained that no monies were owed by the respective debtor companies or Respondent individually.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED: That Department of Insurance and Treasurer enter a Final Order revoking the licenses held by Respondent, William John Harnett. DONE and RECOMMENDED this 5th day of July, 1988, in Tallahassee, Florida. JOYOUS D. PARRISH Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 5th day of July, 1988.
The Issue The issue in this case is whether Respondent condominium association should have assessed unit owners, in proportionate shares, to pay for the replacement of hurricane-damaged balcony screens, in accordance with Petitioner's policy that repair costs which do not exceed an insurance deductible are "costs of insurance" that must be paid as "common expenses" regardless of what the declaration of condominium provides concerning reconstruction or repair after a casualty.
Findings Of Fact Respondent Fountains South Condominium No. 3C Association, Inc. ("Association") is the entity responsible for operating the Fountains South Condominium No. 3C ("Condominium"). As such, the Association is subject to the regulatory jurisdiction of Petitioner Division of Florida Land Sales, Condominiums, and Mobile Homes ("Division"). The Condominium was created——and continues to be governed by——a Declaration of Fountains South Condominium No. 3C ("Declaration"), which instrument was recorded, in 1987, in the public records of Palm Beach County, Florida. On October 24, 2005, Hurricane Wilma struck Palm Beach County, causing damage to elements of the Condominium. The damaged property included some portions of the "Common Elements." Also damaged were some parts of the "Limited Common Elements." (The terms "Common Elements" and "Limited Common Elements" are defined in the Declaration, the relevant provisions of which will be set forth verbatim below. Generally speaking, though, the Common Elements comprise all of the property of which the Condominium is composed except for that included within the residential units. The Limited Common Elements, which are a subset of the Common Elements, consist of properties or structures whose use is reserved to a particular unit or units to the exclusion of other units.) Fulfilling a statutory obligation (that will be discussed in detail below), the Association had purchased property insurance to protect the Common Elements and Limited Common Elements. Issued by Nutmeg Insurance Company ("Nutmeg"), Policy No. SW 0000071 (the "Policy") provided coverage to the Association for loss or damage to property from multiple risks, including hurricanes. The premium for the Policy——the effective dates of which were from December 31, 2004 to December 31, 2005——was $395,000. The Policy provided for various deductibles depending on the cause of the covered loss. For loss or damage caused by a hurricane, the deductible was 5 percent of the value of the insured property. It is undisputed that, at the time of Hurricane Wilma, this deductible was approximately a quarter of a million dollars. Under the relevant provisions of the Policy, therefore, Nutmeg would not be obligated to indemnify the Association for any loss or damage caused by Hurricane Wilma unless and until the total losses from that particular occurrence exceeded (roughly) $250,000. The Association paid about $5,000 to repair the damage that Hurricane Wilma caused to the Common Elements, using funds on hand that had been saved for such contingencies. Because this expense was far below the applicable deductible, the Association did not submit a claim to Nutmeg. The Association's position regarding the damage to the Limited Common Elements, consistent with its longstanding view of such matters, was that the costs of repairing or replacing such properties should be borne by the respective unit owners to whose exclusive use the damaged elements were reserved. The Association based its position on a provision of the Declaration (which will be quoted below) that assigns the general responsibility for maintenance and repair of the units, together with the Limited Common Elements appurtenant thereto, to the respective unit owners. At the time of Hurricane Wilma, Haskell and Flora Ginns (the "Ginns") owned Unit No. 201 in the Condominium. (As of the final hearing, the Ginns were still the owners of this unit.) The hurricane caused damage both to their unit and to the screens surrounding the balcony outside their unit. It is undisputed that the balcony and screens appurtenant to the Ginns' unit are part of the Limited Common Elements. The Ginns submitted a claim for these losses to their insurer, Allstate Floridian Insurance Company ("Allstate"). By letter dated January 7, 2006, Allstate denied the portion of the Ginns' claim relating to the damaged screens, asserting that the screens were not covered property under the Ginns' policy because they were within the "insuring responsibility" of the Association. The Ginns did not protest Allstate's decision in this regard. (Allstate paid the full policy limit of nearly $30,000 on the Ginns' claim anyway; thus, its denial of coverage for the damaged screens actually had no effect on the reimbursement that the Ginns received from Allstate.) The Ginns then wrote a letter to the Association's president, Milton Kutzin, requesting that the Association pay to replace the damaged screens. Dated January 16, 2006,i the letter reads as follows: Dear Milton: As you may be aware, the screens on the deck of our condo were severely damaged because of Hurricane Wilma. According to the attached memo, the condo is responsible for replacing them. For your information, my insurance company, Allstate Floridian, has refused payment and has advised us that our condo association is responsible (by law) to replace them. We do have an estimate to replace the screens. I shall be happy to discuss this matter with you at any time. Please let me know approximately when this matter will be settled. (The "attached memo" to which the Ginns referred purports to be an undated letter from the Director of Maintenance of Versailles Court (evidently a residential community) to the homeowners of that project, clarifying the responsibilities of the homeowners, on the one hand, and their homeowners' association, on the other, vis-à-vis maintenance obligations. As far as the undersigned can tell, this Versailles Court memorandum has no bearing whatsoever on the issues at hand.) If the Association responded in writing to the Ginns' letter of January 16, 2006, the document is not in evidence. In any event, the Association refused to repair the screens surrounding the Ginns' balcony because (a) it believed that the Ginns were responsible, under the Declaration, for the cost of such repair and (b) the total losses to the Common Elements and Limited Common Elements (including the screens in question) did not come near the deductible under the Nutmeg Policy, meaning that there were no insurance proceeds to distribute to unit owners for repairs to Limited Common Elements. On January 18, 2006, the Ginns paid a company called Rainguard, Inc. either $1,100 or $1,200 to replace the damaged screens around "their" balcony.ii Meantime, on January 13, 2006, the Division rendered a Declaratory Statement in In Re Petition for Declaratory Statement of Plaza East Association, Inc., Docket No. 2005059934, Final Order No. BPR-2006-00239 (DBPR Jan. 13, 2006)(the "Plaza East Declaration"). In the Plaza East Declaration, the Division made a number of statements concerning the meaning and effect of certain provisions of the Florida Condominium Act ("Act") pertaining to the duties of condominium associations as they relate to property insurance. These statements will be examined in greater detail below. For now, it suffices to quote several sentences that form the core of the Division's policy regarding the scope of an association's "insuring responsibilities": As association is not required to insure 100% of the replacement cost of the condominium property, but must have adequate insurance to replace the property destroyed by a hurricane. The board may include reasonable deductibles in replacement value insurance policies. § 718.111(11)(a), Fla. Stat. A deductible amount is part of the cost of insurance and is a common expense for which reserves might be set aside. § 718.111(11), 718.115, Fla. Stat. As such, an association may not shift the cost of an insurance common expense to an individual unit owner as common expenses must be assessed in the proportions or percentages required under sections 718.104(4)(f), 718.116(9), Florida Statutes. [An association therefore] may not shift the cost of the deductible, a common expense, to only those unit owners whose windows were damaged by the insurable event such as a hurricane. Plaza East Declaration at 16 (emphasis added). The Plaza East Declaration reflected——and continues to be authoritative regarding——the Division's firmly fixed policy, which is that the deductible under a property insurance policy is a "cost" that an association must incur, using common funds collected through proportionate-share assessments. The Division's expert witness made this clear, giving the following testimony (which the undersigned accepts as credible) in deposition: Q. Doesn't [the] Plaza East [Declaration] declare that a deductible is a common expense? A. Well, it makes the deductible a common expense because insurance is a common expense and the deductible is just a part of the insurance purchase decision. * * * Q. Let me ask you this: Is there anything in [the Act] that clearly states that a casualty loss insurance deductible is a common expense? A. No, sir, there's nothing [in the statutes] that specifically says that. Q. But [the] Plaza East [Declaration] says that, doesn't it? A. Plaza East says that, yes, sir. Q. So that's a policy of the Department? A. Yes, sir, that is. Q. And it's a general policy, isn't it? A. Yes, sir. Q. And it's a general policy that would apply to any condominium in South Florida regardless of what the declaration of condominium said? A. Yes, sir. Q. And that's being applied in this case, isn't it? A. Yes, sir. Deposition of James T. Harrison, Jr. (10/29/07) at 20-21. At some point after the issuance of the Plaza East Declaration, the Ginns sought the Division's help in persuading the Association to reimburse them for the new screens. The Division informed the Ginns of the Plaza East Declaration. Armed with this information, the Ginns again pressed the Association to reimburse them for replacing the screens. The Association, again, declined. By letter dated May 3, 2006, the Ginns made a formal complaint to the Division regarding the Association's refusal to pay for the replacement of the screens. The Division acted promptly, completing its investigation into the matter on or before May 10, 2006. Siding with the Ginns, the Division demanded, in a letter dated May 22, 2006, that the Association either reimburse the Ginns or (possibly) be fined. Yet, the Association resisted. On July 28, 2006, the Division entered a Notice to Show Cause against the Association, charging as follows: Count 1: Respondent [Association], in violation of section 718.115(2), Florida Statutes, failed to asses unit owners in their proportionate shares for the common expense insurance deductible to repair damage to condominium property caused by a hazard to be insured by Respondent under section 718.111(11), Florida Statutes. The Respondent refused to treat the hurricane damage to the wrap-a-round deck and screens in unit #201 as a common expense covered by the association's policy under sections 718.111(11) and 718.115(1), Florida Statutes. Specifically, the Respondent failed to reimburse Haskell Ginns and Flora Ginns for damage sustained by Hurricane Wilma to their wrap-a-round screens. Since the May 22, 2006, warning letter, the complainants have replaced their wrap-a- round deck screens at a cost of $1,200.00 and have requested reimbursement from Respondent. The Association demanded a formal hearing.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Division enter a final order rescinding the Notice to Show Cause and exonerating the Association of the charge of failing to assess unit owners, in proportionate shares, to pay the cost of repairing or replacing Limited Common Elements damaged during Hurricane Wilma. DONE AND ENTERED this 10th day of January, 2008, in Tallahassee, Leon County, Florida. JOHN G. VAN LANINGHAM Administrative Law Judge Division of Administrative Hearings Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 10th day of January, 2008.
The Issue At issue in this proceeding is whether proposed Florida Administrative Code Rule 69O-186.003(1)(c) constitutes an invalid exercise of delegated legislative authority.
Findings Of Fact Parties ATIF was established in 1948 by Florida lawyers in order to provide title insurance services to their clients. ATIF has over 6,000 member agents, all of whom are members of the Florida Bar issuing title insurance in private practice. ATIF issues policies exclusively through its member agents. Stewart Title is a title insurer operating in all 50 states. Stewart Title issues title insurance policies in Florida directly, through affiliated companies, and through independent agents. First American is a title insurer operating throughout the United States. It offers the JLP in states other than Florida, and sells the product directly, through independent agents, and through affiliated agents. As of 2007, approximately 27% of First American's business was written directly. The Financial Services Commission (the "Commission") serves as the agency head of OIR for purposes that include rulemaking. The Commission comprises the Governor, Attorney General, Chief Financial Officer, and Commissioner of Agriculture. § 20.121(3) and (3)(c), Fla. Stat. OIR is a structural unit of the Commission responsible for all activities concerning insurers and other risk bearing entities, including but not limited to licensing, rates and policy forms. The head of OIR is the Director, also known as the Commissioner of Insurance Regulation. § 20.121(3)(a)1, Fla. Stat. The JLP Title insurance is purchased to insure the purchaser (or his lender) against disputes regarding the ownership of a given piece of real property. Title insurance guarantees the transferability of the title to real property. The JLP is title insurance intended to cover "junior" mortgages, which include second mortgages and home equity loans. The JLP is intended to be less comprehensive and less expensive than a traditional owner's or lender's primary title insurance policy. The JLP ensures that the borrower is the last grantee of record for the property being used as collateral for the loan. It ensures that the tax payments are current, insures against any liens on the property, and ensures that the legal description on the policy is the same legal description found on the last deed of record.2 The JLP is not authorized for sale in the state of Florida because OIR has yet to approve a premium rate for this type of title insurance. As more fully explained below, ATIF and First American filed petitions in 2003 seeking OIR's approval of the forms and rates necessary for the issuance of the JLP, pursuant to Section 627.782, Florida Statutes. The Statute and Proposed Rule Title insurance contracts generally are governed by Chapter 627, Part XIII, Florida Statutes. Section 627.7711, Florida Statutes, provides the following definitions: As used in this part, the term: (1)(a) "Closing services" means services performed by a licensed title insurer, title insurance agent or agency, or attorney agent in the agent's or agency's capacity as such, including, but not limited to, preparing documents necessary to close the transaction, conducting the closing, or handling the disbursing of funds related to the closing in a real estate closing transaction in which a title insurance commitment or policy is to be issued. (b) "Primary title services" means determining insurability in accordance with sound underwriting practices based upon evaluation of a reasonable title search or a search of the records of a Uniform Commercial Code filing office and such other information as may be necessary, determination and clearance of underwriting objections and requirements to eliminate risk, preparation and issuance of a title insurance commitment setting forth the requirements to insure, and preparation and issuance of the policy. Such services do not include closing services or title searches, for which a separate charge or separate charges may be made. "Premium" means the charge, as specified by rule of the commission, that is made by a title insurer for a title insurance policy, including the charge for performance of primary title services by a title insurer or title insurance agent or agency, and incurring the risks incident to such policy, under the several classifications of title insurance contracts and forms, and upon which charge a premium tax is paid under s. 624.509. As used in this part or in any other law, with respect to title insurance, the word "premium" does not include a commission. "Title insurer" means any domestic company organized and authorized to do business under the provisions of chapter 624, for the purpose of issuing title insurance, or any insurer organized under the laws of another state, the District of Columbia, or a foreign country and holding a certificate of authority to transact business in this state, for the purpose of issuing title insurance. "Title search" means the compiling of title information from official or public records.[3] Section 627.782, Florida Statutes, titled "Adoption of Rates," provides as follows: Subject to the rating provisions of this code, the commission must adopt a rule specifying the premium to be charged in this state by title insurers for the respective types of title insurance contracts and, for policies issued through agents or agencies, the percentage of such premium required to be retained by the title insurer which shall not be less than 30 percent. However, in a transaction subject to the Real Estate Settlement Procedures Act of 1974, 12 U.S.C. ss. 2601 et seq., as amended, no portion of the premium attributable to providing a primary title service shall be paid to or retained by any person who does not actually perform or is not liable for the performance of such service. In adopting premium rates, the commission must give due consideration to the following: The title insurers' loss experience and prospective loss experience under closing protection letters and policy liabilities. A reasonable margin for underwriting profit and contingencies, including contingent liability under s. 627.7865, sufficient to allow title insurers, agents, and agencies to earn a rate of return on their capital that will attract and retain adequate capital investment in the title insurance business and maintain an efficient title insurance delivery system. Past expenses and prospective expenses for administration and handling of risks. Liability for defalcation. Other relevant factors. Rates may be grouped by classification or schedule and may differ as to class of risk assumed. Rates may not be excessive, inadequate, or unfairly discriminatory. The premium applies to each $100 of insurance issued to an insured. The premium rates apply throughout this state. The commission shall, in accordance with the standards provided in subsection (2), review the premium as needed, but not less frequently than once every 3 years, and shall, based upon the review required by this subsection, revise the premium if the results of the review so warrant. The commission may, by rule, require licensees under this part to annually submit statistical information, including loss and expense data, as the department determines to be necessary to analyze premium rates, retention rates, and the condition of the title insurance industry. Section 627.783, Florida Statutes, titled "Rate deviation," provides as follows: A title insurer may petition the office for an order authorizing a specific deviation from the adopted premium. The petition shall be in writing and sworn to and shall set forth allegations of fact upon which the petitioner will rely, including the petitioner's reasons for requesting the deviation. Any authorized title insurer, agent, or agency may join in the petition for like authority to deviate or may file a separate petition praying for like authority or opposing the deviation. The office shall rule on all such petitions simultaneously. If, in the judgment of the office, the requested deviation is not justified, the office may enter an order denying the petition. An order granting a petition constitutes an amendment to the adopted premium as to the petitioners named in the order, and is subject to s. 627.782. Section 627.7843, Florida Statutes, titled "Ownership and encumbrance reports," provides as follows: As used in this section, the term "ownership and encumbrance report" means a report that discloses certain defined documents imparting constructive notice and appearing in the official records relating to specified real property. An ownership and encumbrance report may not directly or indirectly set forth or imply any opinion, warranty, guarantee, insurance, or other similar assurance as to the status of title to real property. Any ownership and encumbrance report or similar report that is relied on or intended to be relied on by a consumer must be on forms approved by the office, and must provide for a maximum liability for incorrect information of not more than $1,000. On April 11, 2003, First American filed with OIR a petition for approval of title insurance policy forms, including schedules and endorsements thereto, previously approved by ALTA, for the issuance of the JLP in Florida, subject to a rate determination pursuant to Section 676.782, Florida Statutes. The petition asserted that First American had established historical data reflecting an "almost negligible default rate" for such policies, and that the growing market for "no-cost" or "low-cost" home equity loans and junior loans had led many institutional lenders to seek a product such as the JLP that could be provided quickly, accurately, and at a reasonable cost to the lender or borrower. First American did not suggest a specific premium rate for its proposed JLP.4 On or about April 14, 2003, ATIF filed with OIR a "petition for rulemaking setting title insurance rates." ATIF's petition sought approval of forms previously adopted by ALTA. Unlike the First American petition, the ATIF petition requested a specific premium rate, in the following terms: Based on the high-demand and low anticipated claims rates for this type of coverage, Petitioner estimates that a rate equal to 30% of the rate premiums presently promulgated for a mortgage title insurance policy pursuant to Rule 4-186.003, F.A.C.[5] with a minimum premium of $100.00 per policy, will provide a reasonable margin for underwriting profit and contingencies, including contingent liability as provided in [Section 627.7865, Florida Statutes],[6] such as to allow a rate of return on capital that will attract and retain adequate capital investments in the title insurance business and maintain an efficient title insurance delivery system. In support of such rate, Petitioner would show as follows: The Petitioner's low prospective loss experience under the proposed policy. The Petitioner's low expenses and low prospective expenses for administration and handling of risks. The proposed premium will be $1.725 per $1,000 of coverage up to and including $100,000, and $1.50 per $1,000 of coverage in excess of $100,000, up to and including $250,000 of maximum coverage, with a minimum premium of $100.00. This proposed rate will not be excessive, inadequate or unfairly discriminatory, and will apply throughout the State of Florida. This proposed rate will be subject to the Respondent's review not less frequently than once every three (3) years, and may be revised based on such review. By letter dated June 13, 2003, OIR informed ATIF that it agreed the rulemaking process should be initiated in this matter, and that OIR would hold workshops to gather information as to the propriety of the rate suggested by ATIF. OIR's letter notified ATIF that OIR neither approved nor disapproved of the forms submitted by ATIF at that time, pending receipt of sufficient data at the workshops to permit OIR to make an informed decision. By letter dated June 23, 2003, ATIF's senior underwriting counsel, Ted Conner, informed OIR that ATIF did not dispute OIR's decision to initiate the rulemaking process and postpone approval of ATIF's forms. Following receipt of the First American and ATIF petitions and the decision to initiate the rulemaking process, OIR commissioned The David Cox Company to prepare an actuarial report (the "Cox Report") on the rates and forms for the proposed JLP. OIR general counsel Steven Parton recalled that Mr. Cox was hired to provide "an independent look" at the two proposed rates. Mr. Cox requested information from ATIF and First American. ATIF responded with detailed answers to Mr. Cox' questions as well as to follow-up questions from OIR concerning the scope of services required to make the determination of insurability under the JLP and the events that might trigger a claim under such a policy.7 The Cox Report, dated September 2003, and provided to OIR on November 24, 2003, made the following relevant recommendations: the ALTA Residential Limited Coverage Junior Loan Policy form, the Short Form Limited Coverage Junior Loan Policy and endorsements JR1 and JR2, all dated 10/19/96, should be adopted; eligibility for the JLP should be restricted to institutional lenders, to land having 1-4 residential units, and to loan amounts less than or equal to $250,000; and that the JLP premium should be no lower than $2.00 per $1,000 of liability and no higher than $2.60 per $1,000 of liability. The premium for a standard title insurance policy is $5.75 per thousand of liability. Fla. Admin. Code R. 69O-186.003(1)(a). Mr. Cox justified his premium recommendation in summary as follows: My recommended Junior Loan Policy risk rate of $2.00 to $2.60 is a 55% to 65% discount off of the owner's policy risk rate. The discount is based on judgment considering the relatively low level of expense and loss for the Junior Loan Policy, other Florida risk rate discounts and rates used in other states. The proposed rates should not result in inadequate compensation to insurers operating through independent agents. The Cox Report was conceptually based on a comparison of the JLP to a standard title insurance policy. Mr. Cox ultimately made an actuarial judgment as to the proper discount based on the reduced coverage, the fact that eligibility would be restricted to low cost, low risk title transactions, and the reduced expenses associated with the JLP. Mr. Cox concluded his report as follows: The Junior Loan Policy is a new product in Florida and out-of-state experience is incomplete and in some respects is not comparable. By necessity judgment must be used to set the Junior Loan Policy risk rate. This section will examine the consequences of setting an initial risk rate that is either too high or too low. The title insurance industry tends to view lenders as customers and not land owners [as customers]. This is because lenders are constant business associates while owners come and go. State and Federal laws prohibit rebating to lenders and other middlemen. Rebating drives up the cost of title insurance for the land owner. Rates for the junior loan policy that are set too low would act as a rebate to the lenders who pay the Junior Loan Policy premium directly. Furthermore, title insurers do not intend to track the expenses of the junior loan policy versus the owner's policy and any subsidy of the junior loan policy rates by the owner's policy rates will never be detected and corrected. Florida case law has upheld the rebating of commissions by title insurance agents (the agent's 70% share of the risk premium).[8] The rebating of related title services is not permitted under [Florida Administrative Code Rule 4-186.003(13)(a)][9] in that related title services cannot be provided below actual cost. Assuming there is competition in the junior loan title insurance segment, there would be little error in having a somewhat high risk rate because rebating commissions would adjust the risk rate downward.[10] This assumption does not, however, apply to policies written directly buy [sic] an insurer, in which case there is no commission to rebate. There are currently no insurers operating primarily on a direct basis in Florida . . . The primary consumer for the Junior Loan Policy is the lender. The second mortgage lender is concerned with low closing costs and usually pays the title insurance premium directly. Lenders have much more bargaining power than borrowers as regards title insurance premiums. Price competition for the Junior Loan Policy is expected to be strong and lenders should be able to obtain rebates on commissions and discounts on related title services. A critical part of title insurance risk rate is that part retained by insurers operating through independent agents. This segment's only source of revenue is the 30% retained risk rate. Agents, attorneys, insurers operating through owned agencies, insurers writing directly and insurers providing related title services can supplement their revenues with related title service fees, which are essentially unregulated. Two prominent Florida title insurers, United General Title Insurance Company and Alliance Title of America, Inc. rely predominantly on the insurer's portion of the risk premium. These companies could sustain a net operating loss on Junior Loan Policy business if the risk rate is set too low. There is a range of reasonable risk rates for the Junior Loan Policy. A rate set on the high end of this range would avoid hurting insurers operating through independent agents while not necessarily hurting others. Setting a flat risk rate rather than a series of risk rates that decrease with the amount of liability further provides support for insurers operating through independent agents. Subsequent to the issuance of the Cox Report, First American commissioned Milliman USA to prepare an actuarial report (the "Milliman Report") regarding rates and forms for the JLP. The Milliman Report, written by actuary Paul Struzzieri, was dated February 2004. The Milliman Report concurred with the Cox Report as to the ALTA forms that should be adopted, and that eligibility for the JLP should be restricted to land having 1-4 residential units. As to rates, the Milliman Report recommended that the JLP premium should be no lower than $0.86 per $1000 of liability, and no higher than $1.33 per $1000 of liability, and recommended a cap of $500,000 on the junior mortgage loan. In his report, Mr. Struzzieri took a different conceptual approach from that taken by Mr. Cox, who compared the JLP to a standard title insurance policy to arrive at a judgment of how much the standard policy's rate should be discounted to arrive at a fair JLP rate. Mr. Struzzieri believed that a more valid JLP rate could be derived from viewing the rates charged for JLPs in other states, and by comparison to the rates charged in Florida for the Ownership and Encumbrance ("O&E") reports described in Section 627.7843, Florida Statutes, which is set forth in full at Finding of Fact 9, supra. Mr. Struzzieri explained his proposed rates as follows: The rationale for my proposed rates is two- fold. The Junior Loan Policy has less risk than the Original Title Insurance Policy. The reduced risk comes from reduced levels of coverage and the elimination of defalcation claims. . . . Because there is less coverage, there is significantly less work involved in preparing and issuing a Junior Loan Policy. The following sections describe the support for the Junior Loan Policy losses (associated with reduced risk) and expenses (associated with reduced work load). I believe that these reduced amounts are reflective of the costs underlying a Junior Loan Policy by comparison to (a) rates for Junior Loan Policies in other states and rates for the Ownership and Encumbrance (O&E) report, to which the Junior Loan Policy coverage is most compatible. Reduced Risk As shown in the Cox report, losses are approximately 4% to 7% of the rate in Florida. . . . The current rate for an Original Title Insurance Policy (Owner or Lender) is $5.75 per $1,000 of liability. At a 5% loss ratio, losses would equal approximately $0.30 per $1,000 of liability. In First American's August 15, 2003, response to Cox's request for information regarding the Junior Loan Policy, a loss rate of $0.03 per $1,000 of liability is assumed. I believe that this is a reasonable estimate of the loss potential for the Junior Loan Policy, based on my attached analysis. . . .[11] This represents a 90% decrease in the losses underlying the Original Title Insurance Policy rates. The proposed Junior Loan Policy rates are 74% to 85% lower than the $5.75 rate, lower percentages than that indicated by the loss experience (i.e., 90%).[12] I believe that this comparison is illustrative of the magnitude of the reduced coverage and, therefore, the reduced effort and expense involved in issuing a Junior Loan Policy. Reduced Work In Florida, "primary title services" are included in the rate and are defined to include: determination of insurability in accordance with sound underwriting practices based upon evaluation of a reasonable search and examination of the title, determination and clearance of underwriting objections and requirements to eliminate risk, preparation and issuance of a title insurance commitment setting forth the requirements to insure, and preparation and issuance of the policy. The amount of work involved in issuing a Junior Loan Policy is greatly reduced because of the reduced coverage. In addition, the risk is reduced because of certain services that are generally performed by the lender. As an example of reduced work, a Junior Loan Policy insures against losses related to the borrower not being the same as the grantee in the last recorded deed. In order to determine insurability for a Junior Loan Policy, one must review the search to verify that the borrower is the grantee in the last deed of record. In addition, one must determine that the land described in the policy is the same as the land described in the deed to the borrower. To clear underwriting objections and eliminate risk, one must review the search results from the public records to verify that there are no liens against that borrower and that real estate taxes are current. As an example of reduced risk, I point out that the home equity lender generally performs the closing and disbursement functions. Therefore, most of the costs associated with these functions are borne by the lender and not the Junior Loan Policy issuer. Since neither the agent nor underwriter is involved in disbursing the funds, the defalcation element of the premium is eliminated. Mr. Struzzieri believed that the O&E report is the product most comparable to the JLP and therefore the one most likely to yield a reasonable rate: While the above discussion illustrates the minimal level of work involved in issuing a Junior Loan Policy, it is difficult to quantify the cost of this work because solid expense data is not available. Therefore, it is appropriate to compare the Junior Loan Policy to an O&E report. Essentially, the level of work involved in issuing a Junior Loan Policy is the same as the work performed for an O&E report. The majority of home equity loan transactions in Florida are currently closed using an O&E report. The cost of an O&E report to the lender is typically between $60 and $100 (this includes the cost of a search, which for the Junior Loan Policy would be an additional charge). Anecdotally, the O&E report is purported to be profitable to the companies in this business. For the $75,000 home equity loan used by Cox in the exhibits to his report, the premium for the Junior Loan Policy at the lower proposed rate ($0.86 per $1,000 of liability) would be $64.50[,] just above the low end of the range of O&E costs. Although the Junior Loan Policy provides broader coverage than the O&E report in Florida, the loss portion of the rate is small (estimated at $0.03 earlier in this report). Therefore, we conclude that my proposed rate (lower bound) of $0.86 is appropriate in Florida. The higher bound proposed rate ($1.33) would produce a premium of $99.75 in this example[,] equal to the high end of the range of O&E costs. As mentioned earlier, the cost associated with a search would be added onto the $99.75 premium. Therefore, I believe that any rate higher than $1.33 would be excessive. Unlike the Cox Report, the Milliman Report did not expressly consider the impact of an insurer's business model in the rate determination. Mr. Cox noted that setting a rate at the high end of his reasonable range "would avoid hurting insurers operating through independent agents while not necessarily hurting others." Mr. Struzzieri made no assessment of the impact his proposed rate would have on title insurers that operate through independent agents. This impact is of great concern to ATIF because it operates exclusively through independent agents, and because Subsection 627.782(1), Florida Statutes, permits the agent to retain as much as 70% of the premium. On April 30, 2004, OIR published proposed JLP rules establishing a JLP premium rate of $1.33 per $1000 of liability. Florida Administrative Weekly, vol. 30, no. 18, pp. 1788-1790. OIR general counsel Steven Parton testified that this rate was based on the Milliman Report and on "what we thought was an understanding among insurers that $1.33 per $1,000 would be acceptable to everybody. That turned out not to be true." Mr. Parton recalled that ATIF did not find the $1.33 rate acceptable.13 On September 10, 2004, OIR published a "Notice of Withdrawal" of those proposed rules. Florida Administrative Weekly, vol. 30, no. 37, p. 3784. In a letter to Ted Conner of ATIF dated August 17, 2004, OIR deputy director Lisa K. Miller explained OIR's decision to withdraw the proposed JLP rule as follows, in pertinent part: Thank you for working with the Office during the investigation of the proposed junior loan title product and the development of proposed rule drafts. At this time the Office has determined not to adopt the requested junior loan title product. Applicable statutory provisions do not specifically grant legislative authority for a rule adopting the JLP product, as required by FL Board of Medicine v. FL Academy of Cosmetic Surgery, Inc., 808 So. 2d 243, 253 (Fla. 1st DCA 2002). Additionally, Section 627.784, Florida Statutes prohibits casualty title insurance such as the JLP product.[14] Adoption of this proposed rule would therefore be arbitrary, capricious, and not reasonably related to any statue that could possibly enable the Office to adopt the JLP through a rule, in contravention of Joseph v. Henderson, 834 So. 2d 373, 375 (Fla. 2d DCA 2003). . . . By Order dated May 20, 2005, OIR approved First American's use of the ALTA Residential Limited Coverage Junior Loan Policy form, with Florida modifications, and endorsement form JR1, both dated 10/19/96. On June 3, 2005, OIR published proposed Florida Administrative Code Rule 69O-186.003 with a proposed rate of $0.86 per $1000 of liability written. Florida Administrative Weekly, vol. 31, no. 22, pp. 2029-2030. This version of the proposed rule was held to be an invalid exercise of delegated legislative authority, but only on the procedural ground that OIR had published the rule without the approval of the Commission as the agency head. Attorneys' Title Insurance Fund, Inc. and Florida Land Title Association, Inc. v. Financial Services Commission and Office of Insurance Regulation, Case No. 05-2630RP (DOAH May 17, 2006). OIR filed its notice of appeal of the summary final order in Case No. 05-2630RP to the First District Court of Appeal, but voluntarily dismissed the appeal on March 23, 2007. On June 12, 2007, the Commission approved for publication proposed Florida Administrative Code Rule 69O-186.003, again proposing a rate of $0.86 per $1,000 of liability written. The full text of the Proposed Rule is as follows: 69O-186.003 Title Insurance Rates. The following are risk rate premiums to be charged by title insurers in this state for the respective types of title insurance contracts. To compute any insurance premium on a fractional thousand of insurance (except as to minimum premiums), multiply such fractional thousand by the rate per thousand applicable, considering any fraction of $100.00 as a full $100.00. (1)(a) and (b) No change. For junior loan title insurance: The premium for junior loan title insurance shall be: $0.86 per $1,000.00 of liability written; The minimum premium shall be $50.00; The minimum insurer retention shall be 30%. This rate is approved for use with the following junior loan title insurance policy forms, copies of which are available on the Office's website www.floir.com: ALTA Residential Limited Coverage Junior Loan Policy (10/19/96)(with Florida Modifications) and ALTA Endorsement JR 1 (10/19/96); ALTA Short Form Residential Limited Coverage Junior Loan Policy (10/19/96)(with Florida Modifications), and ALTA Endorsement JR 1 (10/19/96); and Any substantially similar product that insures the same type risk. This rate does not include the $25.00 premium that shall be charged when issuing the optional ALTA Endorsement JR 2 (Revolving Credit/Variable Rate)(10/19/96) on a junior loan title insurance policy, as provided for in Florida Administrative Code Rule 69O-186.005(6)(c).[15] Eligibility for the junior loan policy shall be restricted to the following: The insured title is for land having 1-4 residential units; The junior loan must be a second or subsequent mortgage loan and must meet the definitional requirements of a "federally related mortgage loan", as defined in the Real Estate Settlement Procedures Act of 1974, 12 U.S.C. s. 2602, which is incorporated by reference and a copy is available from the Office; The junior mortgage loan amount is less than or equal to $500,000; No junior loan policy may be issued for an amount less than the full junior loan principal debt. (2) through (12) No change. On June 22, 2007, OIR published the notice of the Proposed Rule. As specific authority for the Proposed Rule, the notice cited Sections 624.308, 626.9611, 627.777, 627.782, and 627.793, Florida Statutes. The notice stated that the Proposed Rule would implement the following: Subsections 624.307(1), 626.9541(1)(h)3.a., Sections 627.777, 627.782, 627.783, 627.7831, 627.7841, 627.7845, and Subsection 697.04(1), Florida Statutes. OIR held a rule development workshop on July 24, 2007. On November 14, 2007, the Commission approved the Proposed Rule for final adoption. Petitioners' claim The Petition notes that Subsection 627.782(1), Florida Statutes, provides that at least 30% of the proposed JLP premium must be retained by the title insurer. ATIF asserts (without contradiction at the hearing) that the Legislature established this 30% minimum retention to ensure that market pressures, such as competition to attract and keep agents, do not lead title insurers to retain less premium than necessary to maintain their economic viability. Florida title insurers generally retain only the minimum 30% of the premium due to competition for agents. At the hearing, Petitioners presented a breakdown of the division of premium that would occur with the sale of a $100,000 policy if the JLP premium were set at $0.86 per $1,000. Out of a total premium of $86.00, the title insurer would receive $25.80. From this premium, the insurer must cover its expenses for issuing the JLP, generate a profit sufficient to attract and retain adequate capital investment, and set aside reserves to pay for claims. Petitioners noted that Subsection 625.111(1)(b), Florida Statutes, requires title insurers to maintain a guaranty fund of $0.30 per $1,000 of net retained liability for policies written or title liability assumed in reinsurance. On a $100,000 policy, the title insurer would be required to place $30.00 into the guaranty fund. Petitioners also noted that Section 624.509, Florida Statutes, requires title insurers to pay a premium tax of 1.75% of their gross receipts on each policy. The insurer is liable for the tax on the full premium, even though the insurer actually retains only 30% of that amount. On a $100,000 policy with a premium of $86.00, the premium tax paid by the insurer would therefore be $1.51. Petitioners concluded that when the statutory liabilities ($30.00 guaranty fund and $1.51 premium tax) are deducted from the title insurer's 30% share of the $86.00 premium, the title insurer would actually lose $5.71 on a $100,000 policy. This deficit would have to be covered by funds from the insurer's general operating budget. Mr. Conner, now ATIF's vice president and associate general counsel, testified that the $5.71 per policy loss does not address other underwriting costs, such as policy processing, the cost of operating the claims department, the general overhead of running a large business, or the return on capital required under Subsection 627.782(2)(b), Florida Statutes. Petitioners also offered evidence that the overall cost of performing the services associated with a JLP policy would greatly exceed the premium generated by the $0.86 per $1,000 rate. Mr. Conner spoke at the July 2007, workshop and tried to explain that the proposed JLP rate would not cover the expense of providing primary title services. OIR general counsel Steve Parton responded that OIR had no hard data on the cost of those functions and thus had no way of incorporating ATIF's concerns into the proposed rate. In an attempt to quantify the cost of providing primary title services for a JLP policy, Mr. Conner directed his central Florida branch staff to randomly16 select five residential properties on which a hypothetical second mortgage would be sought and to conduct a search and examination of title consistent with issuing a JLP. This analysis yielded the conclusion that primary title services, including labor costs, for a JLP policy cost a little over $100 per policy. If overhead is included, the total costs are approximately $150 per policy. Mr. Conner testified that the cost of performing these primary title services would be constant regardless of the size of the policy, and that they would have to be paid from the agent's maximum 70% share of the premium.17 On a $100,000 policy, the agent's share of the premium based on a rate of $0.86 per $1,000 would be $60.20. Mr. Conner further testified that a rate sufficient to cover the cost of the primary title services and provide a reasonable profit would be very close to the $2.00 to $2.60 range recommended by the Cox Report. Mr. Conner concluded that the agent's share would be "wholly inadequate" to compensate him for the work he must do. Mr. Conner testified that a number of ATIF's member agents represent lenders such as credit unions and community banks, and these agents will be issuing policies on second mortgages issued by those institutions. ATIF is concerned that the inadequate rate proposed by OIR could lead agents to issue the JLP without performing all the necessary title services, which would naturally increase ATIF's claims experience.18 Mr. Conner concluded that any title company offering the JLP at $0.86 per $1000 of liability, even by selling the product directly, would be offering it as a loss leader to obtain customers for other products. Petitioners contend that OIR's proposed adoption of the $0.86 per $1000 premium rate for the JLP fails to give "due consideration" to the specific ratemaking criteria set forth in Subsection 627.782(2), Florida Statutes. Petitioners contend that the proposed premium is plainly inadequate and insufficient for the JLP to exist as a self-sustaining product, and will thus require the title insurer to supplement issuance of the JLP with premium dollars collected on its other title insurance policies. Petitioners note that such a drain on premiums for these other policies was not contemplated when those policies' rates were adopted. Petitioners contend that the evidence establishes that OIR and the Commission have failed to consider the impact of the proposed premium rate on title insurance agents, including the adequacy of the rate in paying for the cost of primary title services connected with the JLP, and the agents' ability to earn a rate of return on their capital that will attract and retain adequate capital investment in the title insurance business and maintain an efficient title insurance delivery system, as required by Subsection 627.782(2)(b), Florida Statutes. Finally, Petitioners contend that the proposed JLP rule is vague and ambiguous because it provides that the JLP premium is approved for use with the named ALTA policies or with "[a]ny substantially similar product that insures the same type risk," but does not define the term "substantially similar product." OIR's response OIR's position is that it fulfilled its statutory ratemaking obligations under Subsection 627.082(2)(b), Florida Statutes, and made a rational decision to rely on the Milliman Report and the opinion of Mr. Struzzieri. Mr. Parton conceded the apparent anomaly of rejecting the OIR-commissioned, independent actuarial report of Mr. Cox in favor of a report commissioned by and based entirely on information provided to the actuary by a single company, First American. Mr. Parton also offered considered reasons for the agency's rejection of its own actuarial report. Mr. Parton testified that OIR had a number of concerns with the Cox Report. In the first place, Mr. Cox' fundamental premise regarding Florida law was inaccurate: OIR is not required to "create a rate that would fit everybody's business model." The rate promulgated by OIR need not be sufficient to guarantee profits to companies operating through agents. OIR believed that the Cox Report placed undue emphasis on setting a rate amenable to companies that worked only through agents and disregarded companies that perform direct sales even though the JLP, because it is a simple transaction, is tailored toward a direct business approach. Mr. Parton believed that Mr. Cox should have focused on a company such as First American, which was actually selling the JLP in other states and presumably could provide actual market data for use in recommending a rate. OIR also took issue with Mr. Cox' preference for setting the rate on the high side of the recommended range. The Cox Report noted that agents are free to rebate part of the rate to their customers. Relying on a rebate scheme to bring down rates hides the real cost of title insurance from both the consumer and regulator, and introduces unfair discrimination because not everyone will be able to take advantage of the rebate. OIR concluded that the existence of a rebate scheme constitutes an admission that the rate is excessive. OIR also suggested that ATIF's concern about not being able to cover expenses from the insurer's 30% share of premium could be solved by the insurer taking a greater share of the premium. OIR believed that the conceptual approach of the Milliman Report was more sound, because the agency was persuaded that the JLP bears much more resemblance to an O&E report than to a primary title insurance policy. Mr. Parton testified that during discussions with industry representatives, he had raised the question whether the JLP was really a title insurance product at all. Mr. Parton felt that the JLP was really "an [O&E] report that is trying to be dignified to the level of actually being an insurance policy, whereas an [O&E] report as it is set out in statute is not for the purposes of insurance and has a limit I believe of $1,000 for which you can make any claim against that report. Yet here we were with essentially a product that did nothing more than create an [O&E] report." OIR believed that the Milliman Report made more sense than the Cox Report because the former treated the product as OIR saw it: an O&E report with an insurance product attached. Mr. Parton pointed out that both reports relied on a great deal of actuarial judgment because the JLP is a new product to Florida. Mr. Cox arrived at his recommended rate by discounting a standard title insurance policy, whereas Mr. Struzzieri chose to rely on the costs and loss experience of a company that is actually writing this type of policy in other states. OIR concluded that the Milliman Report more consistently reflected the risk associated with the policy and the policy's intent to deal with simple transactions. Mr. Parton testified that OIR considered the statutory "reasonable margin for underwriting profit and contingencies" ratemaking factor through its reliance on the Milliman Report's analysis of O&E reports. By assuming that the costs embedded in an O&E report are covered by the price First American charges for that product, and then assuming that the cost of producing a JLP would be similar to the costs of producing an O&E report, Mr. Struzzieri was able to arrive at the concluding assumption that $0.86 per $1,000 of coverage would provide a reasonable level of profit for the JLP. OIR accepted the Milliman Report's conclusions without further inquiry into the data upon which Mr. Stuzzieri relied. Mr. Parton testified that OIR did consider all the business models in the industry, but finally chose to go with the lowest rate proposed: [T]he OIR and the Governor and Cabinet in looking at the business models, [ATIF] is a strictly agent-driven entity; that is to say, all sales are through agents. First American as well as [Fidelity National Title Insurance Company], who also sells this product and is not contesting this rate, use a combination of sales through independent agents, affiliated agencies, which are owned, if you will, by the company in direct writing. [The JLP] is a product that frankly lends itself greatly to direct writing, particularly since what you're talking about is essentially simple transactions as opposed to major transfers of title of property. So at the end of the day, in looking at what is going on, we're looking at a company, actually two companies, who are actually selling this product nationwide, have a business model which allows them to write direct, which we believe and I think it's reported reduces costs, and a company who does it strictly through agents and who is not selling this product and has never sold this product . . . [OIR] and [the Commission] in our recommendation and explanation has [sic] come to the conclusion that we have an ability here to actually set a rate that significantly lowers cost in at least limited circumstances. We have a company who is actually engaged in the business of selling this, and we have a company who has proposed a rate and had said, "I can write this rate and make a profit at 86 cents." So ultimately the decision was to go with that particular matter. Thus, OIR's position on giving "due consideration" to the ratemaking factor of "reasonable margin for underwriting profit and contingencies" found at Subsection 627.782(2)(b), Florida Statutes, as explicated by Mr. Parton, is that the statute allows OIR to set the rate at the lowest level at which any one company's actuary concludes it can make a profit.19 If the rate is set any higher, then the company that could have made a profit at the lower rate will be charging an excessive rate, to the detriment of policyholders. Mr. Parton testified that OIR was "not setting the rate for the industry as a whole. . . . I'm setting the rate we believe . . . meets all the requirements of the law, which may not be for the industry as a whole, but in fact can be adjusted if needed." OIR set great store in the fact that the $0.86 per $1,000 rate was proposed by "someone who actually engages in that business, who has engaged an actuary to take a look at the rate based upon the factors of the company who is actually doing it, and they use a direct business model." ATIF is not marketing this product anywhere in the country, and may never market it with its totally agent- generated business model. Mr. Parton stated that "due consideration was given by the fact that the insurers that are actually doing business in this matter have a business model which puts less emphasis on agent generated business and more on direct writing . . .". Mr. Parton noted that one factor leading to the adoption of the proposed rate was the availability of the "rate deviation" process set forth in Section 627.783, Florida Statutes. See Finding of Fact 8, supra, for the statute's text. Mr. Parton testified that Mr. Cox erred in not taking note of the rate deviation statute in his recommendation: ... Florida law allows any insurer to petition for deviation from a promulgated rate, and that's one of the things that, frankly, I believe Mr. Cox did not consider in setting this rate. If, in fact, the rates were set too low for [an] insurer operating through independent agents, and that insurer felt that it hurt him to be able to charge that, that insurer has the ability to petition for deviation and to have a rate set higher than that based upon what they have petitioned. . . . All they have to do is petition the Office pursuant to the statute, prepare whatever documentation under oath they feel supports what they need, and the Department [sic] will make a determination whether or not that justifies a higher rate.[20] * * * . . . It is not necessary for us to take into account the whole industry in adopting a rate when, in fact, the law particularly contemplates that that rate is not necessarily going to be the same for everybody and allows for companies who have a different business practice and different approach to present that to the Office for approval to charge a different rate. And if that's what [ATIF] wants to do, that's fine. So, it's difficult for me to understand how they're adversely impacted by that. Mr. Parton asserted that the rate deviation statute was especially significant to OIR's analysis because Chapter 99-286, sec. 13, Laws of Florida, changed the provision from an industry-wide deviation to one applying to a single applicant, meaning that for the first time the Legislature had authorized more than one rate for each type of title insurance.21 Mr. Parton testified that OIR considered the statutory "loss experience and prospective loss experience" ratemaking factor by holding a rate hearing to which the entire industry was invited, as well as by considering the Cox and Milliman Reports, both of which took loss experience into consideration. Mr. Parton testified that OIR's consideration of the statutory "past expenses and prospective expenses" ratemaking factor was essentially confined to its reliance on the Milliman Report's actuarial judgment in basing the potential costs expenses for the JLP on the costs and expenses associated with an O&E report. Mr. Parton testified that OIR's consideration of the statutory "defalcation" ratemaking factor consisted of adopting the Milliman Report's finding that there is virtually no danger of defalcation with the JLP product because the refinancing would almost always be handled by a bank, eliminating the danger of money passing through the hands of an agent. In summary, OIR's defense of proposed Florida Administrative Code Rule 69O-186.003(1)(c) is premised on its acceptance of the Milliman Report. This acceptance in turn reflects acceptance of the core concept of that report: that the JLP more resembles an O&E report than it does a traditional primary title mortgage policy. Expert testimony on the Milliman Report Dr. Nelson R. Lipshutz testified on behalf of Petitioners as an expert in the economics of the title insurance industry. Dr. Lipshutz has decades of experience in the design and implementation of title insurance statistical plans and ratemaking, including having designed ALTA's Uniform Financial Reporting Plan and Uniform Statistical Plan, which are used as the basis for title insurance regulation in roughly half of the United States. He collects data on behalf of rating bureaus in three states, has served as a consultant for several state departments of insurance (including Florida's) and is the author of a textbook, The Regulatory Economics of Title Insurance. Dr. Lipshutz was retained by ATIF to analyze the Milliman Report. At the hearing, Dr. Lipshutz explained that, unlike other lines of insurance, title insurance is not a loss reimbursement activity; rather, it is a loss prevention activity. Title insurance does not insure against some future contingency, but looks to the past to insure the state of title at a particular point in time. Relative to other lines of insurance, losses consume a small portion of the premium. With title insurance, more of the premium goes toward searching the title in a very complete way. Dr. Lipshutz stated that in most casualty lines, the amount of premiums going out in losses is between 60% and 110%, whereas the losses for title insurance are between 3% and 10%. Because such a small percentage of the title insurance premium goes to the underwriter, the losses are still significant, but loss prevention costs drive the rate for title insurance. In examining the Milliman Report, Dr. Lipshutz first critiqued Mr. Struzzieri's loss calculation, which was based on five years (1999 through 2003) of First American's experience writing JLPs. Mr. Struzzieri had data from First American as to its total liability written in each of those years, and the actual losses incurred on those policies up to June 2003. He also had national loss data averages developed by Milliman to predict the percentage of overall expected losses that were represented by those actual losses as of June 2003. These numbers allowed Mr. Struzzieri to calculate projected ultimate losses for each year, including a projected ultimate loss per $1,000 of liability. Mr. Struzzieri's ultimate projection was an expected loss of $0.03 per $1,000 of liability for the JLP. This projection included two years, 2001 and 2003, for which Mr. Struzzieri had no loss data and thus projected zero losses on over $6 million in liability written. At the outset, Dr. Lipshutz noted that title insurance has a long tail line, meaning that losses take a long time to come in. Unlike auto insurance, where the losses are fairly well known during the policy year, the tail on title insurance can go out for 20 years. The losses in title insurance must be projected and Mr. Struzzieri was conceptually correct in attempting a loss projection. Dr. Lipshutz faulted Mr. Struzzieri's projection for including the "highly unlikely" scenario of policy years with zero losses. Dr. Lipshutz also noted that the estimated losses for 1999, the earliest year in the report and therefore the year with the most fully developed losses, were $0.14 per $1,000, almost five times Mr. Struzzieri's overall projected loss for the JLP. Dr. Lipshutz was also critical of Mr. Struzzieri's use of national data because title insurance is "highly geographically idiosyncratic." Factors that can lead to losses in Florida, such as navigational servitudes, are insignificant in a state such as Arizona. Dr. Lipshutz found no discussion in the Milliman Report of the Florida market, as opposed to general comments on the title insurance industry. Dr. Lipshutz also noted that mortgage fraud is "endemic" in Florida. The state ranks first in the nation in mortgage fraud, with a rate twice the national average in 2006. Because a JLP is essentially insuring the identity of the property owner, fraud and identity theft in Florida should not be ignored in any loss calculation. Finally, Dr. Lipshutz faulted Mr. Struzzieri's loss calculation for failing to account for the cyclical nature of title insurance. When the real estate market is doing well, the losses on title insurance are low. When the market goes down, there are large spikes in the loss ratios. Dr. Lipshutz stated that the five years included in Mr. Struzzieri's analysis were some of the best years ever in the real estate industry. Using a mere five-year experience base will not lead to a good result unless the analysis accounts for the fact that the years under review are very strong for the market, and factors in the inevitable down cycles of the market. Dr. Lipshutz believed that Mr. Struzzieri's analysis gave insufficient consideration of what will happen in a downturn. Dr. Lipshutz next critiqued the Milliman Report's expense calculation or, rather, its lack of an expense calculation. After describing the "minimal level of work" involved in the issuance of a JLP, Mr. Struzzieri noted that it would be difficult to quantify the cost of the work because "solid expense data is not available." Therefore, Mr. Struzzieri looked to expense data for O&E reports as his point of comparison for deriving a JLP expense estimate. The problem with this approach, according to Dr. Lipshutz, was that Mr. Struzzieri also lacked "solid expense data" for O&E reports. Mr. Struzzieri's analysis is "extremely simple" and based on a series of assumptions that lack empirical support. First, Mr. Struzzieri assumes that "the level of work involved in issuing a Junior Loan Policy is the same as the work performed for an O&E report." Nothing in the Milliman Report attempts to quantify the expenses involved in issuing a JLP beyond the assertion that the work is the same as that involved in issuing an O&E report. Having made that assumption, Mr. Struzzieri then asserts that the cost of an O&E report to a lender is usually between $60 and $100. The Milliman Report provides no data to support that assertion. At the hearing, Mr. Struzzieri conceded that he had no supporting data for the $60 to $100 cost range and testified that an unnamed employee of First American gave him those numbers during a telephone conversation. Dr. Lipshutz testified that his own casual Google search of O&E prices in Florida turned up figures ranging from $125 to $250. While acknowledging that his search did not produce a scientific sample, Dr. Lipshutz rightly contended that it nonetheless called into question the validity of the upper end of Mr. Struzzieri's cost range. Finally, Mr. Struzzieri makes an assumption, based on anecdote, that O&R reports are profitable to the companies in that business. The Milliman Report does not include the anecdotes on which this assumption is based. Dr. Lipshutz thus described the Milliman Report's analysis as a conclusion reached at the end of a string of unsupported assumptions: if one assumes that the level of work for a JLP equals that for an O&E report, and assumes that the cost of an O&E report is between $60 and $100, and assumes that the companies make a profit by charging between $60 and $100, then one may assume that a JLP rate that provides the same revenue (calculated by Mr. Struzzieri to be between $0.86 and $1.33 per $1,000 on a $75,000 loan) would be profitable. Because the Milliman Report contained no data to allow one to test the reasonableness of its assumptions, Dr. Lipshutz concluded that the report's findings were unsupported and unreliable. Dr. Lipshutz disputed that a JLP is directly comparable to an O&E report, or at least the notion that such a comparison may be assumed without proof. He pointed out that an O&E differs from a JLP "even on the simplest financial terms." Because an O&E report is not an insurance product, no premium tax is charged on it. Dr. Lipshutz was not certain whether the issuer of an O&E report is required to maintain a guaranty fund, but noted that any such contribution would be negligible because the liability on an O&E report is limited to $1,000. The analysis discussed at Findings of Fact 35 and 36, supra, was performed at Dr. Lipshutz' request. As noted above, ATIF calculated that performing primary title services, including labor costs, for a JLP policy would cost slightly more than $100 per policy, and about $150 if overhead costs are included. ATIF performed the same calculation for an O&E report and found that the production cost would be just under $50 per policy, and just over $100 if overhead is included.22 Included in Dr. Lipshutz' written report were two charts produced by ATIF to support its calculation of the difference in cost between a JLP and an O&E report. The first chart showed the differences in coverage between the two products: Coverage JLP O&E Limit of liability $500,000 $1,000 Ad valorem taxes Yes No Gap coverage Yes No Encumbrances created by or liens against current owner Yes Yes Encumbrances created by or liens against prior owners Yes No Closing protection letter (CPL) coverage for failure of agent to follow lenders' closing instructions Available at no additional charge Not available CPL coverage for fraud or dishonesty of agent in handling lenders' funds or documents Available at no additional charge Not available Revolving credit/variable rate endorsement Available for $25 Not available Retain evidence of determination of insurability and premium charged for seven years Yes No The second chart showed the tasks required to produce a JLP and an O&E report:23 TASK JLP O&E Collect documents from recorder's office relevant to the property AFTER date of last deed or mortgage Yes Yes Collect documents from recorder's office relevant to the property BEFORE date of last deed or mortgage Yes No Check validity of documents Yes No Collect documents from courts for names in ownership AFTER date of last deed or mortgage Yes Yes Collect documents from courts for names in ownership BEFORE date of last deed or mortgage Yes No Check probate and foreclosure cases Yes No Check identity in case of common name Yes No Check for tax liens recorded AFTER date of last deed or mortgage Yes Yes Check for tax liens recorded BEFORE date of last deed or mortgage Yes No Check city and county tax offices for taxes owed Yes No Prepare O&E report No Yes Prepare commitment Yes No Downdate search before closing Yes No Review closing documents for compliance with conditions in commitment Yes No Review closing documents for compliance with lender's closing instructions Yes No Prepare policy Yes No Downdate search after recording and issue JR-1 and/or JR-2 endorsement Yes No From this data provided by ATIF, Dr. Lipshutz concluded that the extra work makes the cost of producing a JLP 85% higher than the cost of producing an O&E report, and corresponds to a rate of $2.52 per $1,000 of insured liability. Even accepting Mr. Struzzieri's range of reasonable rates ($0.86 to $1.33 per $1,000 of liability written), applying this 85% cost factor would change the range to $1.59 to $2.46 per $1,000 of liability. Dr. Lipshutz noted that this range overlaps significantly with the range of $2.00 to $2.60 per $1,000 recommended in the Cox Report. Dr. Lipshutz termed "specious" the statement in the Milliman Report that "[t]he proposed Junior Loan Policy rates are 74% to 85% lower than the $5.75 rate, lower percentages than that indicated by the loss experience (i.e., 90%)." Dr. Lipshutz stated that this statement would be reasonable in the context of auto insurance, where the primary concern is loss reimbursement: if the loss is 90% lower, then the rate should be 90% lower. However, in this case it is "downright silly" to tie rates to losses because loss prevention, not loss reimbursement, drives expenses in title insurance. As noted above, OIR contended that if an underwriter took a larger split of the premium from its agents, or wrote the policies directly, then the $0.86 per $1,000 rate for the JLP would be adequate. Dr. Lipshutz called this contention "violently incorrect." He stated that it is a "specious distinction" to say that a rate could be adequate for a direct writer but inadequate for an underwriter working through agents. Certain core title services must be performed, certain reserves must be set aside, and certain losses will have to be paid regardless of the premium split between the agent and underwriter. If the premium is not large enough to cover all of those costs, the rate will be inadequate regardless of the insurer's business model. As a secondary matter, Dr. Lipshutz noted that it is difficult for underwriters to dictate changes in the premium split to their agents. The market is competitive, and agents will walk away from an insurer that attempts to take more than the statutory 30% split of the premium. Many agents write for multiple insurers, and would likely direct most of their business toward those who were most generous in their premium splits. Dr. Lipshutz did not believe that changing the split is a practical way to solve the rate adequacy problem even from the underwriter's standpoint. Dr. Lipshutz was also critical of OIR's suggestion that dissatisfied insurers could avail themselves of the rate deviation statute, because it is difficult if not impossible to charge a significantly higher price than that charged by other participants in a competitive market. Dr. Lipshutz testified that rates are supposed to be based on industry averages, and thus disputed OIR's theory that a rate is "excessive" for any company that could offer the product for less than the promulgated rate. In a system of regulated competition as described by Dr. Lipshutz, it is a certainty that some companies are going to make more money than others at the promulgated rate. Those companies that cannot make a profit at the promulgated rate will drift out of that line of business. Those companies with high profits will invest more in their business, improving their technology and workflow. The profits and increased efficiency of these companies will appear in the industry data presented to the regulator, which will then fulfill its statutory mandate and lower the rate. However, if the initial rate is set so low that only one firm can sell the product at a profit, all of the other insurers are immediately knocked out of the market. Competition in the title insurance market is based on service as well as price, but the service element of competition would be wiped out by the low rate. Dr. Lipshutz was skeptical of the idea that a title insurer could offset an inadequate JLP premium with other charges because this product will be sold mostly to banks and other large institutional carriers, which have the leverage to resist paying extra charges above the statutory premium rate. Mr. Struzzieri testified at the hearing, after Dr. Lipshutz, to explain his methodology and defend the Milliman Report. He explained that he was contacted by First American to provide a rate analysis for filing with OIR. He reviewed the Cox Report and documents filed by First American in response to the report. Because there was no Florida experience on which to base his calculation, Mr. Struzzieri looked for other benchmarks and decided that the most relevant other experience would be JLP experience in other states. He examined the JLP loss experience of First American in other states and estimated an expected loss of $0.03 per $1,000 of liability written. This contrasted with an expected loss in the range of $0.20 to $0.30 per $1,000 on an original owner's or lender's policy. Mr. Struzzieri noted that, all things being equal, lower losses should result in a lower rate for the product. He agreed with Dr. Lipshutz that in title insurance, underwriting expenses are a more significant factor than expected losses in setting rates. Based on his understanding of the JLP product and what it covers, Mr. Struzzieri concluded that there is less work involved in the JLP than in a primary title policy and therefore less expense. Mr. Struzzieri's understanding was that the JLP "is intended for simple transactions such as, you know, a home equity loan, and that the lender on home equity loans is going to be performing the closing services as opposed to the title agent or the title company, the title insurers." This direct performance of closing services by the lender would eliminate the risk of defalcation by the title insurer or its agents, thus further driving down the cost of the JLP. Mr. Struzzieri stated that First American had no specific expense data for the JLP that would permit him to measure the work involved in producing a policy. Therefore, he needed to find other relevant data that would allow him to estimate the average cost of the work. Mr. Struzzieri's discussions with First American led him to study the O&E report, which seemed "parallel" to the JLP, such that the amount of work involved in the JLP could be assumed equivalent to the amount of work needed to produce an O&E report.24 Mr. Struzzieri decided to use O&E report costs as a proxy for the expense portion of the JLP product. First American told him that O&E report costs were between $60 and $100. Mr. Struzzieri conceded that he had no data to support those O&E costs, and did not doubt that Dr. Lipshutz found companies offering Florida O&E reports at prices well in excess of $100. Mr. Struzzieri also conceded that First American had initially convinced him of the comparability of the JLP and the O&E report by stating that the lender "probably will not close" if any adverse matters are uncovered during the limited search envisioned by the JLP. However, further discussions with First American had clarified that another option would be to exclude the adverse matters from coverage under the JLP and allow the lender to decide whether to close. Mr. Struzzieri pointed out that he checked his recommended rate range of $0.86 to $1.33 per $1,000 against the JLP rates charged by First American in other states. He believed that a comparison to other states' JLPs was more valid than a comparison to an original issue or owner's or lender's policy because of the greatly reduced scope, coverage, and the amount of work involved in a JLP. The data provided by First American showed rates that ranged widely, from $0.73 per $1,000 in California to $3.40 per $1,000 in New Mexico. Out of 29 states listed, only two had rates lower than $0.86 per $1,000. Seventeen of the 29 fell within a range of $1.33 to $2.33. Nonetheless, Mr. Struzzieri pronounced himself satisfied that his recommended range fit reasonably within the range of rates charged in other states. Mr. Struzzieri testified that he accepted Dr. Lipshutz' estimate of the risk of fraud and had no reason to doubt Dr. Lipshutz' data on the subject. However, Mr. Struzzieri did not believe that fraud had any bearing on his calculation of a $0.03 per $1,000 loss on the JLP because fraud losses are a small percentage of total title insurance losses. He acknowledged that there may be a small fraud component that his calculation missed by using national data rather than Florida data, given Florida's higher rate of fraud, but concluded that this component would be at most incremental. Mr. Struzzieri agreed that his data on the cost and profitability of an O&E report was anecdotal and unverified, but disagreed with Dr. Lipshutz' assertion that his anecdotal information about O&E profitability was the source of his conclusion that the JLP will be profitable at the recommended range of rates. Rather, said Mr. Struzzieri, the source of his assertion of profitability was the fact that First American is writing JLP policies in 29 other states, including California at $0.73 per $1,000, and appears to be making a profit on that business. He conceded, however, that this, too, was an assumption on his part. On cross-examination, Mr. Struzzieri was asked about a document he filed at OIR in response to a 2005 title insurance data call issued by OIR. In a letter dated November 17, 2005, Mr. Struzzieri wrote "to point out what I believe are several critical deficiencies in the 2005 title insurance data call." Mr. Struzzieri wrote that the deficiencies fell into two categories: missing information and insufficient data. As to the latter deficiency, Mr. Struzzieri wrote that OIR was not asking for enough information: It is my strong belief based on my many years of working with title insurance data that 5 policy years is insufficient to make rates. Reasons supporting this belief include: Long loss development "tail" -- Title insurance policies have no expiration date; claims continue to be reported far beyond 5 years after the policy effective date. . . . Not many losses reported in first 5 years -- Milliman analysis of title industry composite loss development triangles indicates that only a small percentage of total losses from policy years 2000 through 2004 are expected to have been reported as of December 31, 2004. For example, for policy year 2004, we would expect only 13% of "ultimate" losses to be reported by December 31, 2004. It is, therefore, my belief that policy years 2000 through 2004 are all too immature to be used in ratemaking without the benefit of additional policy years of data and will result in highly variable results. Title insurance cycle Milliman analysis of title insurance profitability indicates that title insurance is cyclical in nature. Specifically, profits vary with the real estate cycle; in particular, mortgage interest rates [sic]. For example, when interest rates are falling, title insurance revenue is higher and loss ratios are generally lower. Expenses are also higher; but not as high as revenue because certain expenses are relatively fixed. Therefore, profits are generally higher. When interest rates rise, revenues fall, expenses fall (but not as fast as revenue) and loss ratios increase. As a result, profits are lower. For this reason, I believe that any title insurance rate making exercise should use as many as 20 years of data (or at least 10 years). The number of years should correspond to a full real estate cycle. The 5 policy years included in the data call correspond to the lowest interest rates in the last 40 years. Therefore, the profits are likely much higher than an average year. When the real estate cycle turns (and there [are] indications that it soon may), the title industry may face losses. By using only the last 5 years, the OIR will be applying rates based off of the most profitable years and applying them to perhaps some very unprofitable years. However, if instead rates were based on 10, 15 or better yet 20 years of data, the OIR will have captured a complete cycle and will have made rates that are appropriate in the long run and, on average, for each individual year of the cycle. Mr. Struzzieri acknowledged his prior opinion that five years of data provides an insufficient basis for ratemaking, especially when those years were so recent that ultimate losses are uncertain. He further acknowledged that his own recommendation for a range of JLP rates was in part based on projected loss data from five years of recent First American policies. Mr. Struzzieri explained this apparent contradiction by noting that, as to primary title insurance, companies have sold the products in Florida for 50 to 60 years and typically report 20 years of data. As to the JLP, First American only had the five years of data used by Mr. Struzzieri. He agreed that more data would be better, but he used what was available. Summary Findings When it decided to commence rulemaking to set a premium rate for the JLP, OIR commissioned The David Cox Company to prepare an actuarial report on the rates and forms for the proposed JLP. The Cox Report recommended a rate ranging from $2.00 to $2.60 per $1,000 of liability, based on Mr. Cox' comparison of the JLP to a standard title insurance policy. Mr. Cox advocated setting the rate on the high end of the recommended range to avoid hurting insurers that operate through independent agents. OIR reviewed the Cox Report and found it flawed. OIR believed the Cox Report's recommended rate range was too high, because Mr. Cox overemphasized protecting companies that operate through agents, when the JLP appears more amenable to direct sales. OIR disapproved of Mr. Cox' rebate strategy for holding down rates, his assumption that the insurer is always bound to accept the 30% minimum premium split with its agents, and his failure to focus on actual market data generated by companies that are selling the JLP in other states. All of OIR's criticisms of the Cox Report's methodology and conclusions were reasonable concerns voiced by the regulatory entity charged with the responsibility to set a premium rate for the JLP. OIR had misgivings about whether the JLP qualified as an insurance product at all, and therefore found the Cox Report's conceptual strategy of "backing out" a JLP rate from the standard title insurance rate less than persuasive. The preponderance of the evidence at the hearing established that OIR's decision to reject the recommendations of the Cox Report was reasonable. OIR has freely conceded that the Proposed Rule is entirely dependent on the Milliman Report, with its recommended range of rates between $0.86 and $1.33 based on First American's experience in other states and the close comparison of the JLP to a non-insurance product, the O&E report. OIR's position, as elucidated by Mr. Parton, is that Section 627.782, Florida Statutes, allows OIR to base its ratemaking decision exclusively on an actuarial analysis conducted on behalf of one company, based on data derived exclusively from that company. OIR is under no obligation to set a rate for the industry as a whole, because any insurer that does not believe it can make a profit at the promulgated rate may petition for an upward deviation pursuant to Section 627.783, Florida Statutes. The rate should be set at the lowest level recommended by any single company's actuary, to ensure that no company can charge an excessive rate. ATIF demonstrated that it cannot profitably sell the JLP at the $0.86 rate set forth in the Proposed Rule. The insurer's 30% share of premium on a $100,000 policy ($25.80) is insufficient to cover its statutory liabilities ($30.00 to the guaranty fund and $1.51 premium tax), let alone its other underwriting costs. The insurer would be required to cover the losses with premiums from other policies.25 Mr. Parton pointed out that the insurer could solve this problem by forcing its agents to accept a 60-40 premium split. However, Dr. Lipshutz convincingly testified that such an imposition is not easily accomplished in a competitive market. Agents would either walk away or steer their less desirable risks toward that insurer. Further, ATIF showed that the cost of performing primary title services for a JLP policy would be a little more than $100, whereas the agent's 70% share of premium on a $100,000 JLP policy at the $0.86 rate would be only $60.20.26 Cutting the agent's share to 60% would merely shift more of the loss for a $100,000 policy onto the agent. However, because the agent's costs are fixed, his 70% share would more than cover expenses on a policy written for $167,000 or more. At a 60% share, the agent would not cover expenses on any policy worth less than $195,000. Mr. Conner of ATIF and Barry Scholnik of Stewart Title agreed that no company could issue the JLP for $0.86 per $1,000 and make a profit, and that a company selling the JLP at that rate would be offering it as a loss leader. OIR countered that ATIF is not marketing the JLP anywhere in the country, and may never do so. OIR asserted that it was entitled to rely on the fact that the $0.86 per $1,000 rate was proposed by a company that is actually selling the JLP throughout the country and has engaged an actuary to make a recommendation based on actual market data. First American maintains that it can generate a profit at the proposed rate through its direct business model. The Florida JLP purchaser should not be forced to pay higher rates in order to subsidize the less efficient "member agent" business model of ATIF. Petitioners' expert, Dr. Lipshutz, discussed at length his dispute with Mr. Struzzieri's loss projection of $0.03 per $1,000 of liability for the JLP. Dr. Lipshutz made valid points regarding the long tail line and cyclical nature of title insurance versus the very recent five years' data employed by Mr. Struzzieri, which included the unlikely projection of two years with zero losses. Mr. Struzzieri conceded that his loss data from First American was not optimal. However, both experts agreed that loss experience is not the driving force in setting title insurance rates. Additionally, Mr. Struzzieri's point that defalcation losses will be virtually nonexistent with the JLP was not effectively countered by Dr. Lipshutz. Even conceding the validity of Dr. Lipshutz' critique, Mr. Struzzieri persuasively argued that any upward projection of the loss projection would have an insignificant effect on the recommended range of rates. The experts and industry witnesses agreed that expenses are the main driver of title insurance rates. Dr. Lipshutz disputed that Mr. Struzzieri performed an expense calculation at all, and certainly questioned every expense assumption upon which Mr. Struzzieri ultimately based his rate recommendation. Mr. Struzzieri first assumed that expense data for O&E reports would provide a reliable basis for a JLP expense estimate. He was forced to use this assumption because First American could provide him with no specific expense data for the JLP, a fact that undercut the rationale for OIR's reliance on the Milliman Report as based on real industry data from a company actually selling the JLP. In fact, Mr. Struzzieri used First American's JLP price data from other states only after the fact as a tool to check the reasonableness of his rate recommendation. The evidence is not entirely clear whether Mr. Struzzieri independently reached the conclusion that the two products are equivalent, or whether this assumption was provided by First American. The Milliman Report does not explain the basis for its assumed equivalence of the O&E report and the JLP beyond a simple assertion that the "level of work . . . is the same" for the two products. At the hearing, Mr. Struzzieri merely stated that he found parallels between the O&E report and the JLP that allowed him to assume their equivalence. Mr. Conner of ATIF testified that the tasks necessary to issue a JLP are "not even close" to those employed to produce an O&E report. In support of this position, Petitioners offered a detailed, step-by-step review of the JLP process versus the process involved in producing an O&E report. This review led Dr. Lipshutz to conclude that the cost of producing a JLP would be 85% higher than the cost of producing an O&E report. Dr. Lipshutz' analysis on this point was credible, the more so because OIR offered no serious criticism of or alternative to Petitioners' evidence regarding the extensive differences between the production process for the two products. The preponderance of the evidence produced at the hearing established that the Milliman Report's assumption of equivalence between the JLP and an O&E report was simply wrong. Even if it were granted that the cost of an O&E report is comparable to that of a JLP, Mr. Struzzieri's assertion that the cost of an O&E report to a lender is usually between $60 and $100 was unsupported. At the hearing, Mr. Struzzieri conceded that he had no supporting data for the assertion and was unable to name the First American employee who gave him those numbers. Dr. Lipshutz' sworn testimony that he found O&E price quotes in Florida ranging from $125 to $250 was admittedly anecdotal but even so was at least as credible as Mr. Struzzieri's undocumented hearsay cost data from an unnamed source. The preponderance of the evidence produced at the hearing established that the Milliman Report's statement of the cost of a typical O&E report was an assumption lacking empirical support. The unsupported assumptions regarding the comparability of the JLP to the O&E report and regarding the cost of an O&E report render the Milliman Report's rate recommendation a speculative exercise, not the basis for an industry-wide JLP rate. Mr. Parton testified that Mr. Struzzieri employed a great deal of actuarial judgment in making his recommendation because the JLP is a new product to Florida, and that OIR was entitled to rely on that actuarial judgment. However, Mr. Struzzieri himself qualified his report with the following: In performing this analysis we have relied on data and other information provided to us by First American Title Insurance Company. We have not audited, verified, or reviewed this data and other information for reasonableness and consistency. Such a review is beyond the scope of our assignment. If the underlying data or information is inaccurate or incomplete, the results of our analysis may likewise be inaccurate or incomplete. (Emphasis added) Petitioners did not question Mr. Struzzieri's actuarial judgment. They questioned the underlying data provided by First American to Mr. Struzzieri, and showed that data to be unsupported in the case of the JLP/O&E comparison, and unverifiable in the case of the O&E costs. Mr. Struzzieri's qualifying statement acknowledges that his conclusions are only as good as their underlying information. OIR may have been entitled to rely on the Milliman Report at the time the Proposed Rule was published, before the agency was aware of the report's flaws. However, this rule challenge hearing is a de novo proceeding, not a review of OIR's past actions. At the hearing, Petitioners established that the Milliman Report was based on faulty assumptions and inadequate data. OIR failed to respond adequately to the objections raised by Petitioners. OIR simply reiterated its position that it had the discretion to rely on Mr. Struzzieri's actuarial analysis, without really answering Petitioners' evidence that the assumptions undergirding the analysis were unsubstantiated. OIR essentially adopted the Milliman Report as its own. Mr. Parton testified that as to each of the "due consideration" ratemaking factors listed in Subsection 627.782(2), Florida Statutes, OIR derived its conclusions largely from the Milliman Report. Whatever the merits of OIR's legal reasoning regarding its statutory ratemaking responsibilities, OIR's reliance on the Milliman Report to meet those responsibilities was misplaced. OIR's only response to Petitioners' sustained attack on Mr. Struzzieri's assumptions was to reiterate its reliance on the Milliman Report. The preponderance of the evidence established that the Proposed Rule was based on unsupported data and was, therefore, arbitrary.
The Issue The issue is whether proposed rule 4-141.020 is an invalid exercise of delegated legislative authority.
Findings Of Fact Based upon all of the evidence, the following findings of fact are determined: Background These cases arose after respondent, Department of Insurance (DOI), published in the Florida Administrative Weekly its notice of intent to adopt new rules 4-141.020 and 4-141-021, Florida Administrative Code. The first rule prescribes procedures for the withdrawal and surrender of a certificate of authority, or the discontinuance of writing insurance in the state. The second rule specifies procedures for implementing the moratorium phaseout process in Section 627.7013, Florida Statutes. By agreement by the parties, rule 4-141.021 is no longer in dispute. Contending that rule 4-141.020 is invalid for numerous reasons, petitioners, United States Fidelity and Guaranty Company (USF&G) and Fidelity and Guaranty Insurance Company (FGIC), filed their petition to determine invalidity of proposed rules on February 25, 1994. Generally, the petition alleges that the rule as a whole conflicts with other statutory and constitutional provisions, as well as the authorizing statute. It further alleges that subsections (3), (5), (8), and (9)(b) of the rule conflict with the authorizing statutes, and that paragraph (9)(b) is also arbitrary, capricious and vague. Petitioner, Holyoke Mutual Insurance Company in Salem (Holyoke), filed its petition to determine invalidity of proposed rules on February 25, 1994. The petition generally alleges that the rule as a whole conflicts with the law being implemented and is arbitrary and capricious. More specifically, the petition alleges that subsections (2)(b), (5), (6)(e)4., (7)(a), (7)(b), (8), (9), (9)(a), and (9)(b) contravene statutory provisions, and that the rule as a whole violates the due process, equal protection, commerce, and impairment of contract clauses of the state and federal constitutions. The Parties Respondent is the state agency charged with the responsibility of administering and enforcing the laws of the state governing insurance companies. Petitioners USF&G and FGIC are foreign insurers authorized to transact insurance in the State of Florida, including personal lines and residential insurance. USF&G and FGIC filed a notice to withdraw from homeowners multi-peril lines of insurance on July 7, 1993, in accordance with Subsection 624.430(1), Florida Statutes. Under that law, petitioners were required to give ninety days notice to the DOI before discontinuing those lines of insurance. The ninety-day notice period would have expired on October 5, 1993. Due to various emergency rules adopted by DOI and newly enacted legislation, the notice to withdraw never became effective. Because the proposed rule would affect their right to discontinue writing certain lines of insurance, petitioners are substantially affected by rule 4-141.020. Petitioner Holyoke is a mutual insurance company that writes business in all the New England states, New York and Florida. As of December 31, 1994, Holyoke had 4,027 homeowner policies and 1,541 dwelling fire policies outstanding in the State of Florida. Some of these property and insurance contracts were entered into prior to the enactment of Section 627.7013, Florida Statutes, which provides for a phaseout of a moratorium imposed by the legislature on the cancellation or nonrenewal of certain policies. On March 11, 1993, Holyoke filed a notice of withdrawal from all lines and kinds of insurance in the State and of the surrender of its certificate of authority pursuant to Section 624.430, Florida Statutes. Its plan was to withdraw over six months, giving all policyholders six months notice before nonrenewing policies over a twelve month period. Due to various emergency rules and statutes, Holyoke has been unable to cease doing business in the state. Since rule 4-141.020 would regulate Holyoke with regard to withdrawing from the homeowners multi-peril insurance market, it is substantially affected by the proposed rule. Events Leading to the Adoption of the Rule Following Hurricane Andrew's landfall in South Florida on August 24, 1992, the insurance industry suffered catastrophic casualty losses which totaled around $15 billion. Many insurance companies announced they were either withdrawing from the state altogether, were withdrawing from the homeowners' line of business, or were cancelling or nonrenewing substantial blocks of policyholders. Beginning on August 31, 1992, the DOI began to issue a string of emergency rules designed to limit cancellations and nonrenewals of insurance policies. None of these rules, however, purported to regulate the withdrawal of insurers from the state or from particular lines of insurance. During this same time period, the DOI adopted two emergency rules establishing procedures for insurers wishing to withdraw from any property lines in Florida. These emergency rules pertaining to insurer withdrawals expired on May 12, 1993, and no authority to restrict withdrawals retroactively has been authorized by the legislature. On May 18, 1993, the DOI imposed emergency rule ER 93-18 which represented its response to market stabilization in homeowners insurance lines. The rule imposed a moratorium on the nonrenewal and cancellation of homeowners insurance policies. The rule did not purport to regulate insurer withdrawals under Section 624.430, Florida Statutes, which governs the surrender of certificates of authority or discontinuance of writing certain lines of insurance in the state. Effective June 8, 1993, the legislature enacted Chapter 93-401, Laws of Florida, which essentially codified a DOI emergency rule and imposed a moratorium on cancellation or nonrenewal of personal lines residential property insurance policies from May 19, 1993, until November 14, 1993. The law was specifically confined to imposing a time-limited moratorium on only the "cancellation and nonrenewal of residential property coverages." Just prior to the expiration of the moratorium, the legislature enacted Section 627.7013, Florida Statutes, which provided for a "phaseout" of the moratorium imposed in Chapter 93-401. The statute provides for the extension of the moratorium on nonrenewal or cancellation of personal lines property insurance imposed by Chapter 93-401, limits unrestricted nonrenewals to five percent per year, and is to remain in effect until November 14, 1996. The statute makes no reference to withdrawals by insurers. Indeed, its purposes, as stated in subsection (1) of the statute, "are to provide for a phaseout of the moratorium (on cancellation or nonrenewal of personal lines residential property insurance policies) and to require advance planning and approval for programs of exposure reduction." It is especially noteworthy that during the same legislative special session in which section 627.7013 was enacted, the legislature considered and rejected legislation that would have created a new section 624.431 granting DOI the authority to condition and prevent withdrawals by insurers. Thus, the legislature rejected a statute which would have provided the DOI with the same authority included in the proposed rule. There is no clear expression in section 627.7013 that the legislature intended the law to operate in a retroactive manner. Because the statute imposes new obligations on insurers, it must be presumed that the legislature intended it to operate prospectively. In contrast, and in response to Hurricane Andrew, when the legislature adopted Chapter 92-345, Laws of Florida, in its December 1992 special session, subsection (2) of section 1 of that law contained specific language that "this section shall take effect upon becoming a law and shall apply retroactively to August 24, 1992." On February 4, 1994, the DOI published notice of its intent to adopt new rules 4-141.020 and 4-141.021. However, the latter rule is no longer in issue. Rule 4-141.020, which is sometimes referred to as the "withdrawal rule," generally sets forth the procedures for withdrawal, surrender of certificate of authority, or discontinuance of writing insurance in the state under section 624.430. More specifically, it provides definitions of various terms [paragraph 2)], provides a DOI interpretation of section 624.430 (paragraphs (3) and (5)], prescribes procedures for withdrawals and reduction of insurance (paragraphs (6)-(8)], and sets out DOI policy regarding the relationship of reduction in business to the moratorium phaseout in section 627.7013 [paragraph (9)]. Sections 624.308(1) and 624.6012, Florida Statutes, are cited as the specific authority for adopting the rule while Sections 624.430, 624.6011, 624.6012 and 627.7013, Florida Statutes, are identified as the law implemented. Prior to Hurricane Andrew, if an insurer wished to (a) discontinue the writing of any one or more multiple kinds of insurance, (b) withdraw from the state, or (c) surrender its certificate of authority, it would simply provide to the DOI notice of its intent to do so as required by section 624.430. As long as the notice complied with the statutory requirements, the withdrawal was self- executing, and DOI did not require specific approval or impose further conditions on the insurer. Thus, before this controversy arose, DOI took the position that the only duty or power granted to it under the section was a ministerial one of altering the certificate of authority to reflect the insurer's withdrawal from certain lines of insurance or, in the case of complete withdrawal from the state, to cancel the insurer's certificate of authority. It has never adopted any permanent rule construing the statute in any other fashion. Although section 624.430 has not been amended by the legislature since it was enacted in 1963, under the proposed rule, section 627.7013 is interpreted as restricting the right of an insurer to withdraw from the state entirely or from a line of insurance. Indeed, the rule provides that section 627.7013 takes precedence over section 624.430, and unless an insurer had filed its notice of withdrawal prior to August 24, 1992, insurers are severely limited in their ability to discontinue lines of business or withdraw from the state through at least November 14, 1996. The Petitions, Stipulation and Proposed Final Orders Because the initial petitions, prehearing stipulation, and proposed final orders sometimes speak to different issues, and some of the allegations are either unclear or not precisely pled, it is necessary to comment on these matters before making findings as to the validity of the rule. Since the initial petitions frame the issues in these cases, and DOI counsel has objected to expanding the issues through stipulation or otherwise, the undersigned has limited the issues to those raised in the initial petitions and deemed all others to be untimely raised. Further, where a party has framed an allegation in its complaint, but failed to argue that issue in its proposed order, that allegation has been deemed to be abandoned. Finally, where allegations are nonspecific and speak to the rule as a whole, and the undersigned is unable to determine the language in the rule being challenged, those allegations have been disregarded. In their initial petition, USF&G and FGIC first contend that the rule as a whole is invalid because it conflicts with, extends or modifies sections 624.430, 627.7013 and "other existing (but unnamed) statutory authority," and it violates the Florida and U. S. Constitutions by interpreting section 627.7013 as taking precedence over section 624.430. In actuality, only subsection (9), and not the entire rule, speaks to this issue and thus the broad allegation has been narrowed in this respect. They have also alleged that the rule in its entirety is invalid because it conflicts with, extends or modifies the "authorizing statute" in that it purports to require filings and information not authorized by statute. Because these alleged illegal filing requirements are found in paragraph (6)(e), the undersigned has considered only that provision as subject to attack. USF&G and FGIC also allege that subsections (3), (5), (8) and (9)(b) are invalid because they conflict with, extend or modify the "authorizing statute." Finally, they allege that paragraph (9)(b) is invalid on the additional grounds that the language is arbitrary, capricious, and vague. Since the reference to paragraph (9)(b) appears to have been in error, and petitioners actually intended to challenge paragraph (9)(a), the undersigned will address the latter provision. In summary, then, and notwithstanding the broad allegations in the petition, only parts, and not the whole, of the rule have been placed in question by these petitioners. Because the proposed final order of USF&G and FGIC fails to address subsections (5) and (6)(e), the undersigned has deemed those allegations to be abandoned. Finally, the proposed order raises for the first time a contention that subsection (4) is invalid. This contention has been disregarded as being untimely raised. In its initial petition, Holyoke first contends that the rule in its entirety is invalid "because it would enlarge, contravene, and modify the specific provisions of law that it purportedly implements and because it would be arbitrary and capricious." It then goes on to plead that subsections (2)(b), (5), (6)(e)4., (7)(a), (7)(b), (8), (9), (9)(a), and (9)(b) are invalid on the ground they conflict with, extend, or modify other statutory provisions. Since no specific factual allegations have been made regarding the arbitrary and capricious nature of the rule, and there are no statutory allegations regarding the remaining parts of the rule, the undersigned will treat the petition as challenging only these paragraphs for the single ground stated. Finally, Holyoke alleges that the rule in its entirety violates the due process, equal protection, commerce, and impairment of contract clauses in the State and U. S. Constitutions. In its proposed order, Holyoke has further contended that the above paragraphs are also invalid on the grounds they are arbitrary and capricous, vague, fail to establish adequate standards and vest unbridled discretion in the agency. Because the latter three grounds were never raised in the initial petition and, as noted above, there are no specific allegations regarding the arbitrary and capricous nature of the cited paragraphs, these grounds have been disregarded as being untimely raised. Is the Rule Invalid? a. Rule 4-141.020(9) Petitioners' chief concern is the DOI's interpretation, as expressed in subsection (9) of the rule, that section 627.7013 takes precedence over section 624.430 "as to all attempted or desired reductions" affecting personal lines residential policies. Because "reductions" are broadly defined in paragraph (2)(b) of the rule as including the discontinuance of one or mulitiple lines of business, the withdrawal from the state, and the surrender of a certificate authority, subsection (9) effectively prevents an insurer from exercising its rights under section 624.430 until November 14, 1996, when the phaseout statute expires. Since the vitality of much of the rule turns on the validity of subsection (9), the multiple allegations concerning this provision will be addressed first. The exact language in subsection (9) is as follows: (9) Relationship of Reduction to Moratorium Phaseout. The department interprets Section 627.7013(2)(a)4., Florida Statutes, relating to certain applications for reduction filed prior to August 24, 1992, as indicating a legislative intent that as to all attempted or desired reductions affecting "Florida per- sonal lines residential policies" (hereinafter "residential policies"), other than those in which such reduction notice was filed prior to August 24, 1992, Section 627.7013 applies and takes precedence over Section 624.430, and prohibits or limits such reductions affecting residential policies, where there is any relation- ship between the reduction sought, and the risk of loss from hurricane exposure. Subparagraph (2)(a)4. of section 627.7013 provides the principal statutory support for the rule and reads as follows: 4. Notwithstanding any provisions of this section to the contrary, this section does not apply to any insurer that, prior to August 24, 1992, filed notice of its intent to dis- continue its writings in this state under s. 624.430, and for which a finding has been made by the department, the Division of Administrative Hearings of the Department of Management Services, or a court that such notice satisfied all re- quirements of s. 624.430. As explained at hearing by the author of the rule, "by implication" or "negative inference" the DOI construed the above statutory language as manifesting an intent on the part of the legislature to make all types of withdrawals, and not just the cancellation or nonrenewal of personal lines residential property policies, subject to the moratorium phaseout statute. In other words, DOI posits that the legislative exemption from the moratorium phaseout statute of an insurer who filed, prior to August 24, 1992, a notice of its intent to discontinue writings, supports the broad negative inference that section 627.7013 prohibits an insurer not only from "discontinuing its writing" of one or more lines of business after August 24, 1992, but also from withdrawing from the state and surrendering its certificate of authority. In making this interpretation of section 627.7013 in its rule, the DOI ignored the distinctions between "discontinuance of lines of insurance" versus "withdrawal from the state" versus "surrendering a certificate of authority." Section 627.7013 refers only to "discontinue," as opposed to a total withdrawal coupled with a surrender of a certificate. Whatever negative inference might be drawn from subparagraph (2)(a)4. regarding the discontinuance of a line of insurance before August 24, 1992, as opposed to after that date, it cannot be extended to prohibit an insurer's total withdrawal from Florida and the surrender of its certificate of authority. Such an interpretation is not only contrary to the plain language in sections 624.430 and 627.7013, but also subsection 624.416(1), which recognizes an insurer's right to surrender its certificate of authority. To this extent, then, the rule is an invalid exercise of delegated legislative authority. Assuming that the statute is a proper source of authority for imposing restrictions on discontinuing lines of insurance by virtue of the words "discontinue its writings" in subparagraph (2)(a)4., petitioners argue further that DOI has used the rule to interpret the statute so as to have it apply in a retroactive manner to insurance contracts in existence prior to the enactment of the statute. It is undisputed that all petitioners had insurance contracts in existence as of the date of the enactment of the law, and that the rule operates in a retroactive manner by applying to all notices of withdrawal filed prior to the enactment of section 627.7013 but after August 24, 1992. In resolving this issue, the undersigned cannot find, and respondent has not credibly reported, any clear expression in the statute that the legislature intended to apply the statute retroactively. At the same time, the statute affects petitioners' substantive rights by imposing new obligations or duties in connection with their right to withdraw under section 624.430, and thus it is deemed to be substantive in nature. Because the rule has the effect of imposing retroactive obligations and duties on petitioners in contravention of section 627.7013, subsection (9) is found to be an invalid exercise of delegated legislative authority. b. Rule 4-141.020(2)(b) Proposed rule 4-141.020(2)(b) defines the terms "reduce presence in Florida," "reduce," and "reduction" as follows: (b) "Reduce presence in Florida," "Reduce," and "Reduction," as used in this rule are inclusive terms meant to collectively refer to any and all of the following actions as may be desired or taken by an insurer: to surrender its Florida certificate of authority; to withdraw from Florida; or to discontinue the writing of any one or multiple lines or kinds of insurance in Florida. Holyoke contends that the foregoing language is invalid because the term "reduction" is defined as including a total withdrawal from all lines of insurance in Florida and the surrender of a certificate of authority, and thus it contravenes sections 624.430, 624.415, 624.416 and 627.7013. 34. Sections 624.430, 624.6011, 624.6012 and 627.7013 are cited by DOI as the source of authority for the definition. There is nothing in section 624.6011, which classifies insurance into seven "kinds of insurance," nor section 624.6012, which defines the term "lines of insurance," authorizing the broad and sweeping definition of the word "reduction." Similarly, section 627.7013(2)(b) authorizes the DOI to "adopt rules to implement this subsection," but subsection (2) deals only with "the cancellation or nonrenewal of personal lines residential property insurance policies that were in force on November 14, 1993, and were subject to the moratorium." Section 624.430 does speak in general terms to "(a)ny insurer desiring to surrender its certificate of authority, withdraw from this state, or discontinue the writing of any one or multiple kinds of insurance in this state," but in the context of this rule, which seeks to prevent all types of withdrawals under the authority of section 627.7013, the rule clearly contravenes the law being implemented. Therefore, paragraph (2)(b) constitutes an invalid exercise of delegated legislative authority. c. Rule 4-141.020(3) Proposed rule 4-141.020(3) reads as follows: (3) Actions Having the Substantial Effect of a Withdrawal or Discontinuance of Writing Insurance in this State. Reductions subject to Section 624.430, Florida Statutes, include any action or actions the reasonably forseeable substantial effect of which is, or will be when the action is completed, to have discon- tinued the writing of a kind or line of insurance or to have withdrawn from Florida. "Substantial effect" means that, for example, the continuance of a token amount of writing in Florida will not prevent a conclusion that a reduction subject to Section 624.430 has or will occur. Furthermore, it is not determinative of the existence of a reduction requiring notice under Section 624.430, that the action is taken in a single step, or by a series of steps over time, if the reasonably forseeable effect of the action or actions is or will to be to (sic) have substantially effected a reduction. The application of Section 624.430 does not depend upon the insurer's subjective statement of desire or intent as to the effect of its actions. In their petition, USF&G and FGIC contended this part of the rule impermissibly "conflicts with, modifies or extends the authorizing statutes in that the rule adopts a 'reasonably forseeable substantial effect' test for determining whether a proposed action is subject to Section 624.430, Florida Statutes." While petitioners have addressed other somewhat similar provisions in paragraph (9)(a), no argument has been made in their proposed order as to subsection (3), and the undersigned has accordingly assumed the issue to be abandoned. d. Rule 4-141.020(5) Proposed rule 4-141.020(5) prescribes the following time limitations in which an insurer can take no action after filing a notice of reduction with DOI: (5) Notice to Precede Action to Reduce Presence in Florida. An insurer shall take no action in furtherance of a reduction, prior to the expir- ation of 90 days after the receipt by the depart- ment of the notice required by Section 624.430. Prohibited actions include sending any notice of cancellation or termination, or notice of intent to cancel or terminate, to any policyholder, agent, managing general agent, reinsurer, or other person or entity. In their petition, USF&G and FGIC have alleged that the proposed rule conflicts with, modifies or extends "the authorizing statute in that it prohibits an insurer from taking action in furtherance of the proposed reduction prior to the expiration of the 90-day period under section 624.430, Florida Statutes." Holyoke makes the same allegation and contends the rule contravenes sections 624.430, 624.415 and 624.416. The record is not clear on the exact manner in which section 624.430 operates. It may be reasonably inferred, however, that once a notice of withdrawal is filed, the insurer may then begin notifying customers and other interested persons that it will withdraw at the end of the ninety-day statutory time period. By restricting insurers from taking this action in contravention of the terms of section 624.430, and there being no other valid source of authority, subsection (5) is found to be an invalid exercise of delegated legislative authority. e. Rule 4-141.020(6)(e)4. Paragraph (6)(e) describes the content of the notice to be given to DOI when providing a notice of reduction. Subparagraph 4. therein requires the following information to be provided in the notice of reduction: 4. Insurers shall also provide the department with the following information in the notice: A listing of all lines of insurance the insurer than has in force in Florida which will be affected by the reduction, and for each line, a statement of the approximate number of policies and dollars of premium then in force in Florida and which will be affected by the desired reduction. A description of what notice and treatment will be given by the insurer to its affected Florida policyholders concerning the reduction; and what steps will be taken by the insurer regarding processing of any outstanding covered claims of such policyholders while and after the insurer accomplishes its reduction. A description of projected impact of the reduction upon the insurer's Florida agent and agency force, if any. In addition to any other information related to the impact on agents, the insurer shall state the number of affected agents and give a brief description of what they are being told. Holyoke claims that this portion of the rule is invalid because it requires an insurer "to provide excessive information" in contravention of sections 624.430, 624.415 and 624.416. Since the proposed rule is based upon the premise that the DOI has the authority under section 627.7013 to restrict the ability of insurers to withdraw in any fashion, and such statutory authority has been found to be lacking in the laws being implemented, the rule is deemed to be an invalid exercise of delegated legislative authority on the ground it modifies or extends sections 624.430 and 627.7013. f. Rule 4-141.020(7)(a) and (b) These paragraphs describe the DOI's responsibilities once an insurer files a notice of reduction. They read as follows: (7) Department Action Upon Receipt of Notice. Subsequent to receiving the initial filing the department will request the insurer to provide further information, or will conduct such other investigation as is necessary to determine whether the initial information provided is accurate and whether the proposed action will have the effects projected by the insurer. Reduction Tolled During Certain Investi- gations. The department shall inform the insurer by (sic) that the proposed reduction would be in violation of, or cause a violation of, any provision of the Insurance Code or rule of the department, and thereafter the insurer shall not effect the reduction and shall terminate any action then under way towards accomplishment of the reduction, until such time as the department's allegation is determined under Section 120.57, Florida Statutes, and such appeals as may be taken by either party are concluded. Like so many other parts of the rule, Holyoke contends here that the foregoing language is invalid because it contravenes sections 624.430, 624.415, and 624.416. Since the proposed rule purports to place new restrictions on insurers seeking to withdraw, and it has no source of statutory authority, the above language is found to be an invalid exercise of delegated legislative authority on the ground it extends or modifies sections 624.430 and 624.7013. g. Rule 4-141.020(8) This provision provides that no surrender of a certificate is effective until approved by DOI. The specific language in the subsection reads as follows: (8) Certificate of Authority Surrender Effected by Department Order. No surrender or attempted surrender of a certificate of authority is effective until accepted by order of the department. USF&G and FGIC contend the rule conflicts with, modifies or extends section 624.430 since that statute requires an insurer to provide notice that it intends to surrend a certificate of authority, but does not require it to obtain DOI approval to do so. In its petition, Holyoke has alleged that the foregoing language contravenes not only section 624.430, but also sections 624.415 and 624.416. As noted in finding of fact 17, until the enactment of section 627.7013, DOI has always taken the position that a notice of withdrawal did not require specific agency approval. Rather, DOI has said that the only power or duty granted it under section 624.430 was a ministerial one of altering the certificate of authority to reflect the insurer's withdrawal from certain lines of insurance or, in the case of complete withdrawal from the state, to cancel the insurer's certificate of authority. Since section 624.430 has not been amended, and section 627.7013 does not enlarge DOI's rights with regard to a notice of withdrawal filed by an insurer, the paragraph is found to in conflict with both sections 624.430 and 627.7013. Therefore, it is deemed to be an invalid exercise of delegated legislative authority. h. Rule 4-141.020(9)(a) This paragraph generally provides that any reductions in residential policies proposed by an insurer must be unrelated, directly or indirectly, to a reduction of risk of loss from hurricane exposure. The rather lengthy rule reads as follows: Reduction Must be Unrelated to Risk of Loss From Hurricane Exposure. Pursuant to Section 627.7013, where the reduction affects residential policies, the proposed reduction must be unrelated to the risk of loss from hurricane exposure. The department notes that Section 627.7013 does not in any way qualify or limit the requirement that the reduction be unrelated to the risk of loss from hurricane exposure. The department interprets the word "unrelated," as used in Section 627.7013, in the context of the exigent circumstances motivating the enactment of the statute, and the remedial nature of the statute, as requiring a liberal, wide-reaching definition, so that the reduction must be completely unrelated, directly and indirectly, to reduction of risk of loss from hurricane exposure. As stated in subsection (3), above, the department is not bound by the reason facially asserted for the reduction. If the reduction is related in part to reduction of risk of loss from hurricane exposure, the reduction is prohibited unless authorized as type one, two, or three relief, under Rule 4-141.021, notwith- standing that some other reason is in good faith also part of the reason for seeking the reduction. The objective effect of the propose (sic) reduction in reducing hurricane exposure is given more weight than the insurer's subjective motivations, in determining whether the reduction is unrelated to risk of hurricane exposure. Subjective motivation is relevant primarily only where the objective effect is equivocal. Factors which will be given great weight in evaluating whether a desired reduction is related to risk of hurricane loss are: Would the reduction in Florida be accompanied by reduction action by the insurer in other states? If so, would a disproportionate amount of the impact be in areas of the country especially subject to risk of loss from hurricane? How much of the reduction in Florida would be in residential policy exposures as compared to exposures in other lines of insurance in Florida? If the insurer is discontinuing writing only some lines of insurance are the lines being discontinued especially subject to risk of loss from hurricane, as compared to the lines not being discontinued? Does the insurer have a significant con- centration of residential policies and exposure to risk of loss from hurricane exposure under residential policies in Florida? Would the desired reduction significantly reduce the insurer's exposure to risk of loss from hurricane exposure under residential policies in Florida? Holyoke argues that the paragraph contravenes sections 624.430, 624.416 and 627.7013 by stating that any "reduction" must be "unrelated to risk of loss from hurricane exposure" and that "unrelated" means "completely unrelated, directly and indirectly, to reduction of risk of loss from hurricane exposure." At the same time, USF&G and FGIC contend the rule is invalid since it "improperly" defines the term "unrelated" to permit the DOI to apply a subjective "effects" test "using illegal, arbitrary, capricious, and vague factors which fail to establish adequate standards for agency action and which exceed the agency's delegated authority." Although several statutes are cited as being the law implemented, section 627.7013 is the principal source of authority for the rule. Subparagraph (2)(a)1. of the statute provides in relevant part that (t)his subparagraph does not prohibit any cancellations or nonrenewals of such policies for any other lawful reason unrelated to the risk of loss from hurricane exposure. The statutory language unequivocally reserves to insurers the right to cancel or nonrenew policies "for any other lawful reason unrelated to the risk of loss from hurricane exposure." To the extent the rule authorizes DOI to prohibit nonrenewals or cancellations if they are related in part to reduction of hurricane exposure, even if other reasons are in good faith and are part of the reason for seeking the cancellations or nonrenewals, the language contravenes the statute. The rule further provides that if the effect of a reduction in exposure is to avoid hurricane exposure, the nonrenewal or cancellation can be denied even if the insurer has given a lawful reason unrelated to the risk of loss from hurricane exposure. Since it can be reasonably inferred that the ultimate effect of every withdrawal is to reduce to zero the insurer's risk of loss from hurricane exposure, the "effects" test strips the statute of its clear mandate that insurers maintain the right to cancel or nonrenew policies "for any other lawful reason unrelated to the risk of loss from hurricane exposure." For this additional reason, the rule contravenes the statute. Next, while there is some evidential support as to DOI's theory in adopting the rule as a whole, there is no factual basis in the record to support the rationale for the language in paragraph (9)(a). As such, it is deemed to be arbitrary and capricious. Finally, in applying the six factors that would be given "great weight" in evaluating whether a desired reduction is related to risk of hurricane loss, the DOI acknowledges that there are no criteria or guidelines to follow in weighing these objective effects. Indeed, the DOI author admitted he had insufficient experience to fashion more specific guidelines. Even so, the language is not so vague as to confuse a person of reasonable knowledge, nor can it be said that the rule fails to establish adequate standards for agency action which exceed the agency's delegated authority. i. Rule 4-141.020(9)(b) The final provision under challenge is found in paragraph (9)(b) which reads as follows: (b) If the department determines that any proposed reduction violates Section 627.7013, the insurer shall not proceed with the reduction as it affects residential policies, and shall file an application under Rule 4-141.021 which implements Section 627.7013. The reduction in residential policies shall be limited to the extent of relief granted the insurer by the department under Section 627.7013 and Rule 4-141.021. Holyoke contends that this language is invalid because it contravenes sections 624.430, 624.415 and 624.416. Although the allegation is imprecise, it is assumed that petitioner contends the rule impermissibly broadens the definition of the word "reduction" to include an insurer's withdrawal from the state or the surrender of a certificate of authority. Because the undersigned has previously found that the DOI clearly lacks statutory authority under section 627.7013 to limit withdrawals from the state or the surrender of a certificate of authority, and the broad definition of "reduction" in paragraph (2)(b) has been deemed to be invalid, it is found that the language in the rule conflicts with sections 624.430 and 627.7013 and is an invalid exercise of delegated legislative authority. D. Constitutional Claims Even if the rule is a valid exercise of delegated legislative authority, Holyoke nonetheless contends the rule is invalid because it violates the Florida and United States Constitutions in several respects. USF&G and FGIC join in this claim. Due process and takings clause Article I, section 9 of the Florida Constitution provides that "(n)o person shall be deprived of life, liberty or property without due process of law . . ." USF&G, FGIC and Holyoke contend the proposed rule violates this provision and its federal counterpart, the 14th Amendment of the United States Constitution. Holyoke's presence in the state may be characterized as small. Therefore, the absence of economies of scale assures continuing operating losses for the company. Indeed, in 1993 and 1994, Holyoke suffered operational losses in the state of $822,071 and $736,000, respectively, without the landfall of a hurricane. The rule bars Holyoke from withdrawing totally from Florida and surrendering its certificate of authority as it wishes to do. In Holyoke's case, every dollar of risk required to be underwritten in Florida requires that it forego writing business in another state, or increase its surplus-to-writings ratio, thereby increasing the financial risk assumed. The prospect of continuing losses in Florida impacts Holyoke in two ways. First, it suffers a drain on its surplus to the extent of the forced losses. Second, given the relationship between surplus and writing capacity, the loss of surplus caused by the operating losses results in its inability to write business in another state upon the lost surplus. USF&G is now in the process of downsizing its firm. In 1991, it was on the verge of insolvency having suffered losses of $600 million in that year alone. Based on marketing studies performed after 1991, the company has reshaped its corporate strategy and has subsequently withdrawn entirely from two states (Texas and Louisiana), and has withdrawn all personal lines from nine states. In addition, USF&G has made selected withdrawals for particular lines in many other states, and has pared its total employees from 12,500 to 6,000. The proposed rule prevents it from meeting its corporate objective of filing with DOI a notice of withdrawal for personal homeowners multiperil insurance. Equal protection clause Section 2 of Article I of the Florida Constitution provides in part that "(a)ll natural persons are equal before the law." Under the proposed rule, Holyoke must continue to do business in the personal lines market of the state indefinitely, or at least until November 1996. Holyoke contends this is to the detriment of residents of other states in which it writes business, and that the rule favors Florida residents over residents of other states for an illegitimate purpose. Commerce clause The federal commerce clause limits the power of the states to interfere with interstate commerce. Holyoke contends that the interstate allocation of capital and surplus constitutes interstate commerce, and because the proposed rule seeks to regulate its decision as to how to allocate capital and surplus, it violates the commerce clause. Impairment of contracts Article I, section 10 of the Florida Constitution provides that "(n)o . . . law impairing the obligation of contracts shall be passed." All three petitioners contend that section 627.7013, as interpreted by the proposed rule, violates the impairment of contract clauses of both the Florida and United States Constitutions. All petitioners had insurance contracts in existence at the time section 627.7013 was enacted and the rule proposed. Prior to that time, petitioners' rights with respect to those contracts were set forth in section 624.430. The DOI's interpretation of section 627.7013, as expressed in its rule, prohibits the insurers from exercising these pre-existing contractual rights, including the right to withdraw. To this extent, an impairment has occurred. By prohibiting an insurer from withdrawing from the state, DOI's impairment of those rights can be deemed to be substantial. Petitioners operate in a heavily regulated industry. At the same time, according to the findings and purposes of section 627.7013, that legislation was prompted by Hurricane Andrew's "enormous monetary impact to insurers," proposals by insurers to make "substantial cancellation or nonrenewal of their homeowner's insurance policyholders," and the legislature's "compelling state interest in maintaining an orderly market for personal lines residential property insurance."
