The Issue The issue in this case is whether Respondents have violated provisions of Section 627.837, Florida Statutes, through payment of alleged monetary inducements to insurance agents for the purpose of securing contracts which finance insurance premiums.
Findings Of Fact Petitioner is the Department of Insurance and Treasurer (Department). Respondents are Puritan Budget Plan, Inc., and Gibraltar Budget Plan, Inc., (Respondents). Findings contained in paragraphs 3- 23, were stipulated to by the parties. Stipulated Facts Common shares in Respondents' corporations were sold to insurance agent/shareholders for between $500.00 and $2,500.00 per share, depending on date purchased. Presently, and for the purposes of this litigation, marketing and/or administrative fees paid by Respondents to agent/shareholders range from $1.00 to $13.00 per contract produced, depending on the number of payments made, and the amount of the down payment. Each per contract marketing and/or administrative fee paid by Respondents to agent/shareholders is completely unrelated to the number of contracts produced by that agent/shareholder, and is based upon the characteristics of each contract, pursuant to the terms of the shareholder purchase agreement. Perry & Co., pursuant to a written agreement, manages the day to day activities of Respondents, including solicitation of new shareholder/agents. Alex Campos is currently President of Perry & Co. Perry & Co., Dick Perry or Alex Campos have no equity ownership, either direct or indirect, in Respondents corporations. No shareholder of Perry & Co. is also a shareholder in either Respondent, and no shareholder of the Respondents is a shareholder in Perry & Co. No officer or director of Perry & Co. is an officer or director of either Respondent, and no officer or director of either Respondent is an officer or director of Perry & Co. The individual management agreements between Perry & Co. and Respondents are terminable with proper notice by either party. Respondent Puritan Budget Plan, Inc., was originally licensed by the Department as a premium finance company in 1984, pursuant to the provisions of Chapter 627, Part XV, Florida Statutes. Puritans' principle office is located at 2635 Century Parkway, Suite 1000, Atlanta, Georgia 30345. Respondent Gibraltar Budget Plan, Inc., was originally licensed by the Department as a premium finance company in 1984, pursuant to the provisions of Chapter 627, Part XV, Florida Statutes. Gibraltar's principle office is located at 2635 Century Parkway, Suite 1000, Atlanta, Georgia 30345. Customers of Respondents are typically financing automobile insurance premiums. There is little if any variation among licensed premium finance companies in the State of Florida as to the interest rate charged to customers. In 1988, the Department inquired of Respondents' activities in relation to agent/shareholder compensation arrangements. After several meetings with representatives from Respondents, the Department closed the matter without taking any action. Also in 1988, the Department proposed the adoption of Rule 4-18.009, which in part would have explicitly made payment of processing fees or stock dividends a violation of Section 627.837, Florida Statutes, but later withdrew the proposed rule. Again in 1994, the Department proposed a rule which would have explicitly made payment of processing fees or stock dividends a violation of Section 627.837, Florida Statutes. After a hearing and adverse ruling by the hearing officer, the Department withdrew proposed Rule 4-196.030(8). Financial consideration paid to insurance agents in exchange for the production of premium finance contracts may result in the unnecessary financing of contracts, and the Department believes Section 627.837, Florida Statutes, was intended to make such conduct illegal. Financial consideration paid to insurance agents in exchange for the production of premium finance contracts may result in insurance agents adding or sliding unnecessary products to make the total cost of insurance more expensive and induce the financing of additional contracts, and the Department believes Section 627.837, Florida Statutes, was intended to make such conduct illegal. An "inducement" is presently defined as "an incentive which motivates an insurance purchaser to finance the premium payment or which motivates any person to lead or influence an insured into financing the insurance coverage being purchased; or any compensation or consideration presented to a person based upon specific business performance whether under written agreement or otherwise." Rule 4-196.030(4), Florida Administrative Code (July 27, 1995). This rule is currently effective but presently on appeal. There is no evidence that Respondents unnecessarily financed any premium finance contracts or engaged in any "sliding" of unnecessary products to induce the unnecessary financing of contracts. Section 627.837, Florida Statutes, does not prohibit the payment of corporate dividends based on stock ownership to shareholders who are also insurance agents. According to the Final Bill Analysis for H.B. 2471, in 1995 the Legislature amended Section 627.837, Florida Statutes, relating to rebates and inducements. This section was amended to clarify that this statute does not prohibit an insurance agent or agents from owning a premium finance company. The statute, as amended, is silent on the issue of how owner-agents may be compensated. Other Facts Approximately 80 percent of Respondents' insureds will turn to the shareholder/agent to handle premium mailing and collection. When a shareholder/agent provides these valuable services and labor to Respondents through the servicing of the premium finance contract with an insured, payment for those services and/or recoupment of the expenses involved with their provision is made, at least in part, in the form of the marketing and administrative fees paid by Respondents to the shareholder/agent. The marketing and administrative fee payment by Respondents to shareholder/agents is made from the net profit of the corporation and represents payment of ownership interest (dividends) to shareholder/agents in addition to payment for shareholder/agent services or expenses. Respondents generally finance "non-standard" private passenger automobile insurance. Such insurance generally covers younger drivers and drivers with infraction points against their license. The average non-standard premium is $500 per year. Thirty percent of non-standard insureds will cancel their insurance prior to the renewal date. Cancellation of policies and financing arrangements by non-standard insurers require the agent to return unearned commissions, about $30 generally. In contrast, payment of an insurance premium in cash guarantees an agent his/her entire commission, an average of $90 per non-standard policy. Consequently, the financial interest of most agents is best served by cash sale of auto insurance as opposed to financing the insurance. The average amount generated by 95 percent of all premium finance contracts executed in Florida would yield an agent/shareholder approximately six dollars per contract.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is recommended that a Final Order be entered dismissing the Administrative Complaints. DONE and ENTERED in Tallahassee, Florida, this 28th day of November, 1995. DON W. DAVIS, Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 28th day of November, 1995. APPENDIX In accordance with provisions of Section 120.59, Florida Statutes, the following rulings are made on the proposed findings of fact submitted on behalf of the parties. Petitioner's Proposed Findings 1.-11. Accepted to extent included within stipulated facts, otherwise rejected for lack of citation to the record. 12. First sentence is rejected as not substantially dispositive of the issues presented. Remainder rejected for lack of record citation if not included within stipulated facts. 13.-15. Rejected to extent not included within stipulation, no citation to record. Incorporated by reference. Rejected, no record citation, legal conclusion. 18.-19. Rejected, not materially dispositive. 20. Rejected, no record citation. 21.-23. Rejected, not materially dispositive. Rejected, record citation and relevancy. Rejected, weight of the evidence. Incorporated by reference. Respondent's Proposed Findings 1. Rejected, unnecessary to result. 2.-3. Accepted, not verbatim. 4. Rejected, unnecessary. 5.-7. Accepted, not verbatim. 8.-9. Rejected, unnecessary. 10. Accepted per stipulation. 11.-12. Rejected, unnecessary. 13. Accepted per stipulation. 14.-16. Accepted, not verbatim. Rejected, hearsay. Rejected, relevance. Rejected, unnecessary. 20.-22. Accepted per stipulation. 23. Rejected, unnecessary. 24.-57. Incorporated by reference. 58.-60. Rejected, unnecessary. 61.-62. Rejected, subordinate and not materially dispositive. 63.-67. Rejected as unnecessary to extent not included in stipulated facts. Accepted per stipulation. Rejected, unnecessary. Accepted per stipulation. 72.-76. Rejected, unnecessary. 77. Accepted per stipulation. 78.-79. Incorporated by reference. 80.-87. Accepted per stipulation. 88. Incorporated by reference. 89.-90. Accepted per stipulation. 91.-95. Rejected, subordinate. 96. Accepted. 97.-101. Rejected, unnecessary. 102. Incorporated by reference. COPIES FURNISHED: Alan Liefer, Esquire Division of Legal Services 612 Larson Building Tallahassee, FL 32399-0333 Steven M. Malono, Esquire Cobb, Cole & Bell 131 N. Gadsden St. Tallahassee, FL 32301 Bill Nelson State Treasurer and Insurance Commissioner Department of Insurance The Capitol, Plaza Level Tallahassee, FL 32399-0300 Dan Sumner Acting General Counsel Department of Insurance The Capitol, PL-11 Tallahassee, FL 32399-0300
The Issue Whether the School Board of Broward County's award of a contract for Excess General and Auto Liability insurance coverage to United National Insurance Company is barred because of illegality?
Findings Of Fact The Parties Ranger Insurance Company, Petitioner, is the holder of a Certificate of Authority dated September 9, 1996 and issued by the Department of Insurance and Bill Nelson, Insurance Commissioner and Treasurer. Good through June 1, 1997, the certificate authorizes Ranger to write in a number of lines of insurance business, including, Private Passenger Auto Liability, Commercial Automobile Liability, Private Passenger Automobile Auto Physical Damage, Commercial Auto Physical Damage and Other Liability. As such, Ranger is an "authorized" or "admitted" insurer in the State of Florida. L.B. Bryan & Company, Alexander & Alexander, Inc., and Benefactor Financial Group, Inc., is a joint venture and co- petitioner with Ranger in this proceeding through whom Ranger proposed to procure the Excess General and Auto Liability (“Excess GL/AL”) coverage. A timely proposal under Request for Proposal 97- 072S was submitted to the School Board of Broward County by the petitioners to provide the Excess GL/AL Insurance Coverage sought by the RFP. United National Insurance Company is an "eligible" surplus lines insurer, approved by the Florida Department of Insurance to transact all surplus lines coverages in the State of Florida and licensed as such. The Department has notified insurance agents of United Nation's eligibility as a surplus lines insurer since 1978. It is the insurer of the Excess General and Excess Auto Liability insurance coverage awarded by the School Board under RFP 97-072S. Arthur J. Gallagher & Company ("Gallagher,") is the eighth largest insurance broker in the world. It has four sales offices, nine service offices, and approximately 150 employees in the State of Florida alone. The office from which it conducted business related to this proceeding is in Boca Raton, Florida, an office for which Area President David L. Marcus is responsible. Gallagher submitted a timely proposal (the "Gallagher proposal,") in response to the RFP on behalf of United National. The School Board of Broward County is the authority that operates, controls, and supervises all free public schools in the Broward County School District, "[i]n accordance with the provisions of s. (4)(b) of Article IX of the State Constitution ...". Section 230.03(2), F.S. In accord with its powers, the School Board may contract directly to purchase insurance. It is not required by its purchasing rules to use a competitive bidding or procurement process to purchase insurance. Nonetheless, on Friday, April 26, 1996, it issued a request for proposals, the RFP at issue in this proceeding, for insurance coverages including for Excess GL/AL insurance coverages. Siver Insurance Management Consultants Siver Insurance Management Consultants ("Siver,") are the drafters of RFP 97-072S. The School Board relied on Siver to draft the RFP, particularly its technical sections. Technical review of the proposals made under the RFP was conducted by Siver. And Siver put together for the School Board's use a summary of the policies proposed by both United National and Ranger. The summary was considered by the School Board's Evaluation Committee when it evaluated the competing proposals. The determination of whether the competing proposers were properly licensed was made by Siver. The School Board's Evaluation Committee, indeed the School Board, itself, played no role in determining the licensing credentials of the proposers while the proposals were under consideration. Under the arrangement between Siver and the School Board, however, the School Board retained the primary responsibility for administering the RFP. The RFP Request for Proposal 97-072S was mailed to 324 vendors (prospective proposers) the same day as its issuance, April 26, 1996. None of the vendors knew the contents of the RFP until it was issued. The RFP sought proposals for seven coverages, each of which was severable from the remainder of the coverages and was allowed to be proposed separately. The scope of the request was described in the RFP as follows: The School Board of Broward County, Florida ... is seeking proposals for various insurance coverages and risk management services. To facilitate distribution of the underwriting data and the requirements for each of the coverages, this consolidated Request for Proposals ... has been prepared. However, each of the coverages is severable and may be proposed separately. The following are included: Boiler & Machinery Excess General and Automobile Liability Excess Workers' Compensation School Leaders Errors & Omissions Crime Including Employee Dishonesty - Faithful Performance, Depositor's Forgery Claim and Risk Management Services (Including Managed Care Services) Statutory Death Benefits Petitioner's Ex. 1, pg. I-1. Since the seven coverages are severable and no proposer had to submit a proposal on all seven coverages, one way of looking at RFP 97-072S is as a consolidated RFP composed of seven, separate proposals, each for a different type of insurance coverage. Of the 324 vendors to whom the RFP was sent, only two, Gallagher, on behalf of United National, and Ranger, through the action of the joint venture, submitted proposals with respect to the Excess GL/AL coverages. Reasons for Using an RFP The School Board, under the auspices of Siver, chose to seek insurance coverage through an RFP rather than an Invitation to Bid, or what is colloquially referred to as a "straight bid," for a number of reasons. As one familiar with RFPs and Invitations to Bid might expect, the School Board and Siver were attracted to the RFP by the increased flexibility it offered in the ultimate product procured in comparison to the potentially less flexible product that would be procured through an invitation to bid. More pertinent to this case, however, Siver chose to use an RFP for the School Board in this case because "as explained ... by the Department of Insurance over the ... years, while there may... [be a] prohibition against any surplus lines agents submitting a straight bid, there would not be a prohibition against a ... [surplus lines] agent responding to a request for proposal " (Tr. 149.) The RFP approach was not chosen, however, in order to avoid any legal requirement or to circumvent the Insurance Code. As explained by Mr. Marshall, the approach was born of hard reality: Id. [O]ne of the primary motivations [for using an RFP rather than an Invitation to Bid] was to allow us [The School Board and Siver] to consider surplus lines companies because of the fact that very often they were the only insurers that would respond on the number of coverages and clients that we were working for. The Insurance Code and the Surplus Lines Law The Insurance Code in Section 624.401, Florida Statutes, requires generally that an insurer be authorized by the Department of Insurance (the "Department,") to transact business in the State of Florida before it does so: (1) No person shall act as an insurer, and no insurer or its agents, attorneys, subscribers, or representatives shall directly or indirectly transact insurance, in this state except as authorized by a subsisting certificate of authority issued to the insurer by the department, except as to such transactions as are expressly otherwise provided for in this code. One place in the code where transactions are "expressly otherwise provided for ...," is in the Surplus Lines Law, Section 626.913 et seq., Florida Statues. The purposes of the law are described as follows: It is declared that the purposes of the Surplus Lines Law are to provide for orderly access for the insuring public of this state to insurers not authorized to transact insurance in this state, through only qualified, licensed, and supervised surplus lines agents resident in this state, for insurance coverages and to the extent thereof not procurable from authorized insurers, who under the laws of this state must meet certain standards as to policy forms and rates, from unwarranted competition by unauthorized insurers who, in the absence of this law, would not be subject to similar requirements; and for other purposes as set forth in this Surplus Lines Law. Section 626.913(2), F.S. Surplus lines insurance is authorized in the first instance only if coverages cannot be procured from authorized insurers: If certain insurance coverages of subjects resident, located, or to be performed in this state cannot be procured from authorized insurers, such coverages, hereinafter designated "surplus lines," may be procured from unauthorized insurers, subject to the following conditions: The insurance must be eligible for export under s. 626.916 or s. 626.917; The insurer must be an eligible surplus lines insurer under s. 626.917 or s. 626.918; The insurance must be so placed through a licensed Florida surplus lines agent; and The other applicable provisions of this Surplus Lines Law must be met. Section 626.915, Florida Statutes, and then only subject to certain other conditions: No insurance coverage shall be eligible for export unless it meets all of the following conditions: The full amount of insurance required must not be procurable, after a diligent effort has been made by the producing agent to do so, from among the insurers authorized to transact and actually writing that kind and class of insurance in this state ... . Surplus lines agents must verify that a diligent effort has been made by requiring a properly documented statement of diligent effort from the retail or producing agent. However, to be in compliance with the diligent effort requirement, the surplus lines agent's reliance must be reasonable under the particular circumstances surrounding the risk. Reasonableness shall be assessed by taking into account factors which include, but are not limited to, a regularly conducted program of verification of the information provided by the retail or producing agent. Declinations must be documented on a risk-by-risk basis. It is not possible to obtain the full amount of insurance required by layering the risk, it is permissible to export the full amount. Section 626.916, F.S. Authorized vs. Unauthorized Insurers Unlike authorized insurers, unauthorized insurers do not have their rates and forms approved by the Department of Insurance, (the "Department.") Similarly, unauthorized insurers are not member of the Florida Insurance Guaranty Association, which guarantees payment of claims if an insurer becomes insolvent. Unauthorized insurers may qualify to transact Florida insurance business under the Surplus Lines Law and so, for purposes of the Surplus Lines Law, be considered "eligible" to transact surplus lines business in Florida. When a Surplus Lines insurer is eligible, Department of Insurance employees refer to the insurer in Surplus Lines terms as "authorized," a term in everyday English that is synonymous with "eligible." But an eligible surplus lines insurer remains an "unauthorized" insurer when compared to an "authorized" insurer for purposes of the Insurance Code and that part of the code known as the Surplus Lines Law. Submission and Review of Proposals Both L.B. Bryan & Company, Alexander & Alexander, Inc., and Benefactor Financial Group, Inc., (the "Joint Venture") and Gallagher submitted timely proposals with regard to Excess GL/AL coverage in response to the RFP. The Joint Venture's proposal was submitted, of course, on behalf of Ranger, an authorized insurer, and Gallagher's was submitted on behalf of United National, an insurer eligible to transact insurance in the State of Florida as a surplus lines insurer but otherwise an unauthorized insurer. The School Board's Insurance Evaluation Committee met on May 30, 1996, to evaluate proposals received pursuant to the RFP. Although briefly discussed by the Evaluation Committee, the issue of proper licensing was not determined independently by the committee. Instead of making that determination, the committee turned to its insurance consultant, Siver. Siver had determined that both proposers, Ranger and United National, were properly licensed for purposes of responding to the RFP and being considered by the committee. Siver communicated that determination to the committee. The committee relied on Siver's determination. Aside from receiving Siver's determination of proper licensing when "briefly discussed" (Tr. 108,) the Evaluation Committee did not address whether either Ranger or United National were properly licensed. Certainly, no issue of whether Ranger should take precedence over United National by virtue that it was an authorized insurer when United National was an unauthorized insurer and a mere eligible Surplus Lines insurer was ever discussed by the committee. In evaluating the proposals, the Committee awarded 73 points to the Gallagher proposal and 69 points to the Ranger proposal. Points were awarded on the basis of three criteria or in three categories: Qualifications (20 points maximum); Scope of Coverages/Services Offered (30 points maximum); and, Points for Projected Costs (50 points maximum.) The Ranger proposal outscored the Gallagher proposal in the "projected cost" category, 50 to 23, but it scored lower in the "qualifications" category, 14 versus 20 for Gallagher, and significantly lower in the "scope of coverages" category, five points versus 30 for Gallagher. The United National coverage was more than twice as costly as Ranger's, a $491,000 annual premium as opposed to Ranger's $226,799, which explains the points awarded in the "projected cost" category. The Gallagher proposal received more points than the Ranger proposal in the "qualifications" category because United National has provided the School Board with Excess GL/AL coverage for a number of years and Ranger has never provided the School Board with such coverage. The Ranger proposal fell so drastically short of the Gallagher proposal in the "scope of coverages/services offered" category primarily because of an athletic participation exclusion appearing in a rider to the specimen policy appearing in its proposal. Ranger had intended to cover athletic participation and the rider was included with the Ranger proposal in error. Ranger notified the School Board of its intent immediately after the tabulations were released. Nonetheless, the Evaluation Committee was never informed of the error and no attempt was made by the School Board to negotiate with Ranger to improve the coverages offered, despite authority in the RFP for the School Board to negotiate with any of the proposers. (The language used in the RFP is "with one or more" of the proposers.) The Ranger proposal also fell short of the Gallagher proposal in the "scope of coverages/service offered" category because the Gallagher proposal was made in several ways. One way was as to only Excess GL/AL coverage. Another way included School Leaders' Errors and Omissions ("E & O") coverage. The E & O coverage was offered by United National in the Gallagher proposal together with the Excess GL/AL coverage in a "combined lines" package, similar to United National coverages already existing for the School Board. Furthermore, the Ranger proposal expressly excluded coverage for Abuse and Molestation, a needed coverage due to the School Board's prior claims history. On June 5, 1996, the Evaluation Committee submitted its recommendations to the School Board's Purchasing Department. With regard to GL/AL coverage, the Evaluation Committee recommended the purchase of the GL/AL/E & O "combined lines" coverage offered by Gallagher through United National. The School Board posted its Proposal Recommendation/Tabulations adopting the recommendation, two days later, on June 7, 1996. Ranger Seeks Redress from the Department Following the School Board's award, Ranger, thinking that it should have received the award under the RFP as the only authorized insurer to submit a proposal for Excess GL/AL coverage, sought redress from the Department. On June 14, 1996, Ranger personnel met with the head of the Department's Surplus Lines Section, Carolyn Daniels, alleging a violation of the Insurance Code's Surplus Lines Law. On June 18, 1996, Ranger reiterated its complaint in writing and asked Ms. Daniels to find a violation that day. On June 24, 1996, Ranger, now through its attorneys, met with Ms. Daniels and her supervisor. Again, on July 4, 1996, Ranger's attorneys wrote to Ms. Daniels, further pleading for her to find a violation and asking for an administrative hearing if Ms. Daniels did not find in favor of the Ranger position. On a fifth attempt, Ranger wrote Ms. Daniels on July 11, 1996, requesting that she adopt Ranger's position. Ms. Daniels reviewed Ranger's five complaints with her supervisor, the Chief of the Bureau of Property and Casualty Solvency and Market Conduct. In a letter dated August 14, 1996, to the School Board's Purchasing Agent, Ms. Daniels announced her determination: I did not find any evidence to indicate that Mr. David L. Marcus of Arthur J. Gallagher & Company or United National Insurance Company violated the Surplus Lines Law in providing a quote for the School Board. Intervenor's Ex. No. 2. Ms. Daniel's determination was based on a number of factors, including the School Board's position in the transaction as an "informed consumer," (Tr. 422-423,) and that the School Board had possessed a United National policy for 13 years. But, the determination was primarily based on the fact that Gallagher had received three declinations from authorized insurers to provide Excess GL/AL coverage and so had performed that which was required prior to deciding that the coverage was eligible for export and provision by a surplus lines insurer: due diligence. Due Diligence Section 626.916(1)(a), Florida Statutes, provides, [n]o insurance coverage shall be eligible for export unless it meets ... the following condition[]: ... [t]he full amount of insurance required must not be procurable, after a diligent effort has been made by the producing agent to do so, from among the insurers authorized to transact and actually writing that kind and class of insurance in this state, and the amount of insurance exported shall be only the excess over the amount so procurable from authorized insurers. (e.s.) The statute goes on to require that the diligent effort, "be reasonable under the particular circumstances surrounding the export of that particular risk." Reasonableness is assessed by taking into account factors which include, but are not limited to, a regularly conducted program of verification of the information provided by the retail or producing agent. Declinations must be documented on a risk-by- risk basis. Section 626.916(1)(a), F.S. "'Diligent effort' means seeking coverage from and having been rejected by at least three authorized insurers currently writing this type of coverage and documenting these rejections." Section 626.914(4), F.S. Under this definition, the "producing agent should contact at least three companies that are actually writing the types of clients and the business in the area [that they are] wanting to write." (Tr. 268.) A specific form to help insurance agents document their three rejections is adopted by Department rule. The rule provides: When placing coverage with an eligible surplus lines insurer, the surplus lines agent must verify that a diligent effort has been made by requiring from the retail or producing agent a properly documented statement of diligent effort on form DI4-1153 (7/94), "Statement of Diligent Effort", which is hereby adopted and incorporated by reference. Rule 4J-5.003(1), F.A.C. Fully aware of the requirement for documentation of diligent effort to find authorized insurers, and cognizant that it would be unlikely that an authorized insurer could be found based on experience, Gallagher began soliciting proposals for coverage in the middle of April, 1996, several weeks before the School Board had issued the RFP. In fact, at the time that Gallagher started soliciting bids, the School Board had not yet assembled or distributed the underwriting data needed by bidders. Nonetheless, with good reason based on experience, Gallagher expected that the School Board would seek a "combined lines" package of GL/AL/E & O coverages like the School Board then received through United National, and that it would be unlikely that an authorized insurer would step forward to propose coverage. Gallagher, therefore, used the policy form current in April of 1996, that is the form providing Excess GL/AL/E & O coverage in a "combined lines" package, "as an example of what the School Board had been looking for this type of program and seeking a program similar to that and similar in coverage." (Tr. 242.) But it also sought Excess GL/AL without combination with E & O coverage. As Mr. Marcus testified, when seeking coverage from authorized insurers beginning in April of 1996, Gallagher "would be looking at a variety of different ways, whether they were package or not." (Tr. 243.) One authorized insurer, Zurich-American, declined to quote because it could not offer a combined line SIR program (a package of excess general liability and excess auto liability coverages) as requested by the RFP. Furthermore, the School Board risk was too large for Zurich-American to handle. A second authorized insurer, American International Group, declined to quote due to the School Board's adverse loss experience. A third authorized insurer, APEX/Great American, declined to provide a quote to Gallagher due to the large size of the School Board account. The responses of these three authorized insurers were listed in a Statement of Diligent Effort provided to Ms. Daniels, which she considered in determining that Gallagher and Mr. Marcus had committed no violation of the Surplus Lines Law. Gallagher also provided Ms. Daniels with a second Statement of Diligent Effort. The statement documented the attempt to attract quotes by adding a school leaders errors and omission component to the Excess GL/AL coverage. It, too, was used by Ms. Daniels in making her determination of no violation of the Surplus Lines Law by Gallagher. The same three insurers refused to quote for the "combined lines" program. Attempts by other Authorized Insurers Gallagher requested that any responses to its requests for quotes be submitted by May 10, 1996, so that it could prepare and submit its proposal by the RFP's deadline for submission of original proposals by all vendors, 2:00 p.m. May 16, 1996. One insurer, Discover Re/USF&G attempted to submit a quote on May 15, 1996, one day before the RFP deadline but five days after May 10. By then, Gallagher had already started printing its 625 page proposal. Furthermore, the company failed to provide the required policy forms until the day after the School Board's deadline for filing proposals. Coregis Insurance Company offered coverage of up to $700,000 for each claim and for each occurrence, but like Discover Re/USF&G, failed to provide the required policy forms until after the RFP deadline. Furthermore, definitive coverage under the Coregis policy would only be provided on the condition that the Florida Legislature pass a Legislative Claims bill, a limiting condition not authorized in the RFP or requested by Gallagher. American Home Assurance Company never responded to Gallagher with the School Board's required quote or policy forms. Rather, the company merely provided an "indication" that the company declined to provide a quote. An "indication" consists of an approximate premium rate, without any terms or conditions. A "quote," on the other hand, includes the terms and conditions of a policy. The Department places with the producing agent the responsibility of determining whether an insurer's communication constitutes and "indication" or a "quote." An agent, according to Ms. Daniels, can only violate the Surplus Lines Law if the agent receives a reliable quote. Gallagher even requested a quote from Ranger, despite never having been appointed to transact insurance on its behalf. But Ranger declined. In response to a request by Gallagher's minority business partner, McKinley Financial Services, Ranger, through E. Michael Hoke on American E & S letterhead, wrote in a letter dated May 6, 1996, "[w]e have received a prior submission on this account so we are returning the attached." Intervenor's Ex. No. 7. The Petition Ranger's petition for formal administrative hearing is the letter dated June 19, 1996, to the Director of Purchasing for the School Board under the signature of E. Michael Hoke, CPCU, Assistant Vice President of AES/Ranger Insurance Company. The letter asks its readers to "bear[] in mind we are not attorneys," p. 1 of the letter, before it outlines three protest issues. The third protest issue is the one about which Ms. Daniels made her determination that no violation of the statute had been committed by Gallagher or its employees: "3) Florida Statute 626.901 (Representing or aiding unauthorized insurer prohibited)." The other two issues deal not with the propriety of Gallagher's actions but the legality of the School Board's award to an unauthorized insurer, United National, when coverage was available from an authorized insurer, Ranger: Florida Statute 626.913 (Surplus Lines Law). . . Our Position * * * Ranger Insurance Company is an admitted authorized insurer ... Its proposal for excess general and auto liability is proof that the Board requested coverage was procurable. United National Insurance Company is an unauthorized insurer under the laws of the State of Florida ... . The United National Insurance Company proposal and/or its offer to extend it's current policies appear to us as "unwarranted competition." Ranger Insurance Company is protected from unwarranted competition from United National Insurance Company in accordance with the Florida Statute 626.913. Florida Statute 626.913 (Eligibility for Export) ... Our Position * * * Ranger Insurance Company is an admitted authorized insurer under the laws of the State of Florida. ... It's proposal for excess general and auto liability is proof that the Board requested amounts were available. The proposal and/or contract extensions offered by United National are for the full amount of coverage sought and not excess over the amount procurable from Ranger, an authorized insurer. The petition, therefore, set in issue not just whether Gallagher acted illegally but whether the School Board acted illegally when it made the award to United National, an unauthorized insurer when Ranger, an authorized insurer, had also submitted a proposal. Extension As soon as the School Board was made aware of the Ranger protest, it extended the existing insurance contracts procured under RFP 92-080S, awarded approximately five years earlier. The extension was on a month-to-month basis until resolution of the protest. The extension was necessary to avoid a lapse in the School Board's coverage during this proceeding.
Recommendation Based on the foregoing, it is, hereby, RECOMMENDED: That the award to United National under the Gallagher proposal in response to RFP 97-072S be rescinded. DONE AND ENTERED this 28th day of January, 1997, in Tallahassee, Florida. DAVID M. MALONEY Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (904) 488-9675 SUNCOM 278-9675 Fax Filing (904) 921-6847 Filed with the Clerk of the Division of Administrative Hearings this 28th day of January, 1997. COPIES FURNISHED: Paul R. Ezatoff, Esquire Christopher B. Lunny, Esquire Katz, Kutter, Haigler, Alderman, Marks, Bryant & Yon, P.A. Post Office Box 1877 Tallahassee, Florida 32302-1877 Edward J. Marko, Esquire Robert Paul Vignola, Esquire Office of the School Board Attorney K.C. Wright Administrative Building 600 Southeast Third Avenue - 11th Floor Fort Lauderdale, Florida 33301 A. Kenneth Levine, Esquire Blank, Risby and Meenan, P.A. Post Office Box 11068 Tallahassee, Florida 32302-3068 Dr. Frank Petruzielo, Superintendent Broward County School Board 600 Southeast Third Avenue Fort Lauderdale, Florida 33301-3125
The Issue The issue in these consolidated cases is whether the Agency for Health Care Administration ("AHCA") properly disallowed Petitioners' expense for liability insurance and accrued contingent liability costs contained in AHCA's audit of Petitioners' Medicaid cost reports.
Findings Of Fact Based upon the oral and documentary evidence presented at the final hearing, and on the entire record of this proceeding, the following findings of fact are made: Petitioners operate licensed nursing homes that participate in the Florida Medicaid program as institutional providers. The 14 Palm Gardens facilities are limited liability companies operating as subsidiaries of New Rochelle Administrators, LLC, which also provides the facilities with management services under a management contract. AHCA is the single state agency responsible for administering the Florida Medicaid program. One of AHCA's duties is to audit Medicaid cost reports submitted by providers participating in the Medicaid program. During the audit period, Petitioners provided services to Medicaid beneficiaries pursuant to Institutional Medicaid Provider Agreements that they entered into with AHCA. The Provider Agreements contained the following relevant provision: (3) Compliance. The provider agrees to comply with local, state, and federal laws, as well as rules, regulations, and statements of policy applicable to the Medicaid program, including Medicaid Provider Handbooks issued by AHCA. Section 409.908, Florida Statutes (2002)1, provided in relevant part: Reimbursement of Medicaid providers.-- Subject to specific appropriations, the agency shall reimburse Medicaid providers, in accordance with state and federal law, according to methodologies set forth in the rules of the agency and in policy manuals and handbooks incorporated by reference therein. These methodologies may include fee schedules, reimbursement methods based on cost reporting, negotiated fees, competitive bidding pursuant to s. 287.057, and other mechanisms the agency considers efficient and effective for purchasing services or goods on behalf of recipients. . . . * * * (2)(a)1. Reimbursement to nursing homes licensed under part II of chapter 400 . . . must be made prospectively. . . . * * * (b) Subject to any limitations or directions provided for in the General Appropriations Act, the agency shall establish and implement a Florida Title XIX Long-Term Care Reimbursement Plan (Medicaid) for nursing home care in order to provide care and services in conformance with the applicable state and federal laws, rules, regulations, and quality and safety standards and to ensure that individuals eligible for medical assistance have reasonable geographic access to such care. . . . AHCA has adopted the Title XIX Long-Term Care Reimbursement Plan (the "Plan") by reference in Florida Administrative Code Rule 59G-6.010. The Plan incorporates the Centers for Medicare and Medicaid Services ("CMS") Publication 15-1, also called the Provider Reimbursement Manual (the "Manual" or "PRM"), which provides "guidelines and policies to implement Medicare regulations which set forth principles for determining the reasonable cost of provider services furnished under the Health Insurance for the Aged Act of l965, as amended." CMS Pub. 15-1, Foreword, p. I. The audit period in these cases spans two versions of the Plan: version XXIII, effective July 1, 2002, and version XXIV, effective January 1, 2003. It is unnecessary to distinguish between the two versions of the Plan because their language is identical as to the provisions relevant to these cases. Section I of the Plan, "Cost Finding and Cost Reporting," provides as follows, in relevant part: The cost report shall be prepared by a Certified Public Accountant in accordance with chapter 409.908, Florida Statutes, on the form prescribed in section I.A. [AHCA form 5100-000, Rev. 7-1-90], and on the accrual basis of accounting in accordance with generally accepted accounting principles as established by the American Institute of Certified Public Accountants (AICPA) as incorporated by reference in Rule 61H1-20.007, F.A.C., the methods of reimbursement in accordance with Medicare (Title XVIII) Principles of Reimbursement, the Provider Reimbursement Manual (CMS-PUB. 15-1)(1993) incorporated herein by reference except as modified by the Florida Title XIX Long Term Care Reimbursement Plan and State of Florida Administrative Rules. . . . Section III of the Plan, "Allowable Costs," provides as follows, in relevant part: Implicit in any definition of allowable costs is that those costs shall not exceed what a prudent and cost-conscious buyer pays for a given service or item. If costs are determined by AHCA, utilizing the Title XVIII Principles of Reimbursement, CMS-PUB. 15-1 (1993) and this plan, to exceed the level that a prudent buyer would incur, then the excess costs shall not be reimbursable under the plan. The Plan is a cost based prospective reimbursement plan. The Plan uses historical data from cost reports to establish provider reimbursement rates. The "prospective" feature is an upward adjustment to historical costs to establish reimbursement rates for subsequent rate semesters.2 The Plan establishes limits on reimbursement of costs, including reimbursement ceilings and targets. AHCA establishes reimbursement ceilings for nursing homes based on the size and location of the facilities. The ceilings are determined prospectively, on a semiannual basis. "Targets" limit the inflationary increase in reimbursement rates from one semester to the next and limit a provider's allowable costs for reimbursement purposes. If a provider's costs exceed the target, then those costs are not factored into the reimbursement rate and must be absorbed by the provider. A nursing home is required to file cost reports. The costs identified in the cost reports are converted into per diem rates in four components: the operating component; the direct care component; the indirect care component; and the property component. GL/PL insurance costs fall under the operating component. Once the per diem rate is established for each component, the nursing home's reimbursement rate is set at the lowest of four limitations: the facility's costs; the facility's target; the statewide cost ceiling based on the size of the facility and its region; or the statewide target, also based on the size and location of the facility. The facility's target is based on the initial cost report submitted by that facility. The initial per diem established pursuant to the initial cost report becomes the "base rate." Once the base rate is established, AHCA sets the target by inflating the base rate forward to subsequent six- month rate semesters according to a pre-established inflation factor. Reimbursement for cost increases experienced in subsequent rate semesters is limited by the target drawn from the base rate. Thus, the facility's reimbursement for costs in future rate semesters is affected by the target limits established in the initial period cost report. Expenses that are disallowed during the establishment of the base rate cannot be reclaimed in later reimbursement periods. Petitioners entered the Medicaid program on June 29, 2002. They filed cost reports for the nine- month period from their entry into the program through February 28, 2003. These reports included all costs claimed by Petitioners under the accrual basis of accounting in rendering services to eligible Medicaid beneficiaries. In preparing their cost reports, Petitioners used the standard Medicaid Cost Report "Chart of Accounts and Description," which contains the account numbers to be used for each ledger entry, and explains the meaning of each account number. Under the general category of "Administration" are set forth several subcategories of account numbers, including "Insurance Expense." Insurance Expense is broken into five account numbers, including number 730810, "General and Professional Liability -- Third Party," which is described as "[c]osts of insurance purchased from a commercial carrier or a non-profit service corporation."3 Petitioners' cost report stated the following expenses under account number 730810: Facility Amount Palm Garden of Clearwater $145,042.00 Palm Garden of Gainesville $145,042.00 Palm Garden of Jacksonville $145,042.00 Palm Garden of Largo $171,188.00 Palm Garden of North Miami $145,042.00 Palm Garden of Ocala $217,712.00 Palm Garden of Orlando $145,042.00 Palm Garden of Pinellas $145,042.00 Palm Garden of Port St. Lucie $145,042.00 Palm Garden of Sun City $145,042.00 Palm Garden of Tampa $145,042.00 Palm Garden of Vero Beach $217,712.00 Palm Garden of West Palm Beach $231,151.00 Palm Garden of Winter Haven $145,042.00 AHCA requires that the cost reports of first-year providers undergo an audit. AHCA's contract auditing firm, Smiley & Smiley, conducted an examination4 of the cost reports of the 14 Palm Gardens nursing homes to determine whether the included costs were allowable. The American Institute of Certified Public Accountants ("AICPA") has promulgated a series of "attestation standards" to provide guidance and establish a framework for the attestation services provided by the accounting profession in various contexts. Attestation Standards 101 and 601 set out the standard an accountant relies upon in examining for governmental compliance. Smiley & Smiley examined the Palm Gardens cost reports pursuant to these standards. During the course of the audit, Smiley & Smiley made numerous requests for documentation and other information pursuant to the Medicaid provider agreement and the Plan. Petitioners provided the auditors with their general ledger, invoices, audited financial statements, bank statements, and other documentation in support of their cost reports. The examinations were finalized during the period between September 28, 2006, and October 4, 2006. The audit report issued by AHCA contained more than 2,000 individual adjustments to Petitioners' costs, which the parties to these consolidated proceedings have negotiated and narrowed to two adjustments per Palm Gardens facility.5 As noted in the Preliminary Statement above, the first adjustment at issue is AHCA's disallowance of Palm Gardens' accrual of expenses for contingent liability under the category of GL/PL insurance, where Palm Gardens could not document that it had purchased GL/PL insurance. The second adjustment at issue is ACHA's disallowance of a portion of the premium paid by Palm Gardens for the Mature Care Policies. The total amount of the adjustment at issue for each facility is set forth in the Preliminary Statement above. Of that total for each facility, $18,849.00 constituted the disallowance for the Mature Care Policies. The remainder constituted the disallowance for the accrual of GL/PL related contingent liabilities. Janette Smiley, senior partner at Smiley & Smiley and expert in Medicaid auditing, testified that Petitioners provided no documentation other than the Mature Care Policies to support the GL/PL entry in the cost reports. Ms. Smiley testified that, during much of the examination process, she understood Petitioners to be self-insured. Ms. Smiley's understanding was based in part on statements contained in Petitioners' audited financial statements. In the audited financial statement covering the period from June 28, 2002, through December 31, 2002, Note six explains Petitioners' operating leases and states as follows, in relevant part: The lease agreement requires that the Company maintain general and professional liability in specified minimum amounts. As an alternative to maintaining these levels of insurance, the lease agreement allows the Company to fund a self-insurance reserve at a per bed minimum amount. The Company chose to self-insure, and has recorded litigation reserves of approximately $1,735,000 that are included in other accrued expenses (see Note 9). As of December 31, 2002, these reserves have not been funded by the Company. . . . The referenced Note nine, titled "Commitments and Contingencies," provides as follows in relevant part: Due to the current legal environment, providers of long-term care services are experiencing significant increases in liability insurance premiums or cancellations of liability insurance coverage. Most, if not all, insurance carriers in Florida have ceased offering liability coverage altogether. The Company's Florida facilities have minimal levels of insurance coverage and are essentially self-insured. The Company has established reserves (see Note 6) that estimate its exposure to uninsured claims. Management is not currently aware of any claims that could exceed these reserves. However, the ultimate outcome of these uninsured claims cannot be determined with certainty, and could therefore have a material adverse impact on the financial position of the Company. The relevant notes in Petitioner's audited financial statement for the year ending December 31, 2003, are identical to those quoted above, except that the recorded litigation reserves were increased to $4 million. The notes provide that, as of December 31, 2003, these reserves had not been funded by Petitioners. Ms. Smiley observed that the quoted notes, while referencing "self-insurance" and the recording of litigation reserves, stated that the litigation reserves had not been funded. By e-mail dated April 21, 2005, Ms. Smiley corresponded with Stanley Swindling, the shareholder in the accounting firm Moore Stephens Lovelace, P.A., who had primary responsibility for preparing Petitioners' cost reports. Ms. Smiley noted that Petitioners' audited financial statements stated that the company "chose to self-insure" and "recorded litigation reserves," then wrote (verbatim): By definition from PRM CMS Pub 15-1 Sections 2162.5 and 2162.7 the Company does in fact have self-insurance as there is no shifting of risk. You will have to support your positioning a letter addressing the regs for self-insurance. As clearly the financial statement auditors believe this is self- insurance and have disclosed such to the financial statement users. If you cannot support the funding as required by the regs, the provider will have to support expense as "pay as you go" in accordance with [2162.6] for PL/GL. * * * Please review 2161 and 2162 and provide support based on the required compliance. If support is not complete within the regulations, amounts for IBNR [incurred but not reported] will be disallowed and we will need to have the claims paid reports from the TPA [third party administrator] (assuming there is a TPA handling the claims processing), in order to allow any expense. Section 2160 of the Manual establishes the basic insurance requirement: A. General.-- A provider participating in the Medicare program is expected to follow sound and prudent management practices, including the maintenance of an adequate insurance program to protect itself against likely losses, particularly losses so great that the provider's financial stability would be threatened. Where a provider chooses not to maintain adequate insurance protection against such losses, through the purchase of insurance, the maintenance of a self-insurance program described in §2161B, or other alternative programs described in §2162, it cannot expect the Medicare program to indemnify it for its failure to do so. . . . . . . If a provider is unable to obtain malpractice coverage, it must select one of the self-insurance alternatives in §2162 to protect itself against such risks. If one of these alternatives is not selected and the provider incurs losses, the cost of such losses and related expenses are not allowable. Section 2161.A of the Manual sets forth the general rule as to the reimbursement of insurance costs. It provides that the reasonable costs of insurance purchased from a commercial carrier or nonprofit service corporation are allowable to the extent they are "consistent with sound management practice." Reimbursement for insurance premiums is limited to the "amount of aggregate coverage offered in the insurance policy." Section 2162 of the Manual provides as follows, in relevant part: PROVIDER COSTS FOR MALPRACTICE AND COMPREHENSIVE GENERAL LIABILITY PROTECTION, UNEMPLOYMENT COMPENSATION, WORKERS' COMPENSATION, AND EMPLOYEE HEALTH CARE INSURANCE General.-- Where provider costs incurred for protection against malpractice and comprehensive general liability . . . do not meet the requirements of §2161.A, costs incurred for that protection under other arrangements will be allowable under the conditions stated below. . . . * * * The following illustrates alternatives to full insurance coverage from commercial sources which providers, acting individually or as part of a group or a pool, can adopt to obtain malpractice, and comprehensive general liability, unemployment compensation, workers' compensation, and employee health care insurance protection: Insurance purchased from a commercial insurance company which provides coverage after a deductible or coinsurance provision has been met; Insurance purchased from a limited purpose insurance company (captive); Total self-insurance; or A combination of purchased insurance and self-insurance. . . . part: Section 2162.3 of the Manual provides: Self-Insurance.-- You may believe that it is more prudent to maintain a total self- insurance program (i.e., the assumption by you of the risk of loss) independently or as part of a group or pool rather than to obtain protection through purchased insurance coverage. If such a program meets the conditions specified in §2162.7, payments into such funds are allowable costs. Section 2162.7 of the Manual provides, in relevant Conditions Applicable to Self-Insurance.-- Definition of Self-Insurance.-- Self- insurance is a means whereby a provider(s), whether proprietary or nonproprietary, undertakes the risk to protect itself against anticipated liabilities by providing funds in an amount equivalent to liquidate those liabilities. . . . * * * Self-Insurance Fund.-- The provider or pool establishes a fund with a recognized independent fiduciary such as a bank, a trust company, or a private benefit administrator. In the case of a State or local governmental provider or pool, the State in which the provider or pool is located may act as a fiduciary. The provider or pool and fiduciary must enter into a written agreement which includes all of the following elements: General Legal Responsibility.-- The fiduciary agreement must include the appropriate legal responsibilities and obligations required by State laws. Control of Fund.-- The fiduciary must have legal title to the fund and be responsible for proper administration and control. The fiduciary cannot be related to the provider either through ownership or control as defined in Chapter 10, except where a State acts as a fiduciary for a State or local governmental provider or pool. Thus, the home office of a chain organization or a religious order of which the provider is an affiliate cannot be the fiduciary. In addition, investments which may be made by the fiduciary from the fund are limited to those approved under State law governing the use of such fund; notwithstanding this, loans by the fiduciary from the fund to the provider or persons related to the provider are not permitted. Where the State acts as fiduciary for itself or local governments, the fund cannot make loans to the State or local governments. . . . The quoted Manual provisions clarify that Ms. Smiley's message to Mr. Swindling was that Petitioners had yet to submit documentation to bring their "self-insurance" expenses within the reimbursable ambit of Sections 2161 and 2162 of the Manual. There was no indication that Petitioners had established a fund in an amount sufficient to liquidate its anticipated liabilities, or that any such funds had been placed under the control of a fiduciary. Petitioners had simply booked the reserved expenses without setting aside any cash to cover the expenses. AHCA provided extensive testimony regarding the correspondence that continued among Ms. Smiley, Mr. Swindling, and AHCA employees regarding this "self-insurance" issue. It is not necessary to set forth detailed findings as to these matters, because Petitioners ultimately conceded to Ms. Smiley that, aside from the Mutual Care policies, they did not purchase commercial insurance as described in Section 2161.A, nor did they avail themselves of the alternatives to commercial insurance described in Section 2162.A. Petitioners did not purchase commercial insurance with a deductible, did not self- insure, did not purchase insurance from a limited purpose or "captive" insurance company, or employ a combination of purchased insurance and self-insurance. Ms. Smiley eventually concluded that Petitioners had no coverage for general and professional liability losses in excess of the $25,000 value of the Mutual Care Policies. Under the cited provisions of the Manual, Petitioners' unfunded self- insurance expense was not considered allowable under the principles of reimbursement. Petitioners were uninsured, which led Ms. Smiley to further conclude that Section 2162.13 of the Manual would apply: Absence of Coverage.-- Where a provider, other than a governmental (Federal, State, or local) provider, has no insurance protection against malpractice or comprehensive general liability in conjunction with malpractice, either in the form of a limited purpose or commercial insurance policy or a self-insurance fund as described in §2162.7, any losses and related expenses incurred are not allowable. In response to this disallowance pursuant to the strict terms of the Manual, Petitioners contend that AHCA should not have limited its examination of the claimed costs to the availability of documentation that would support those costs as allowable under the Manual. Under the unique circumstances presented by their situation, Petitioners assert that AHCA should have examined the state of the nursing home industry in Florida, particularly the market for GL/PL liability insurance during the audit period, and further examined whether Petitioners had the ability to meet the insurance requirements set forth in the Manual. Petitioners assert that, in light of such an examination, AHCA should have concluded that generally accepted accounting principles ("GAAP") may properly be invoked to render the accrued contingent liabilities an allowable expense. Keith Parnell is an expert in insurance for the long- term care industry. He is a licensed insurance broker working for Hamilton Insurance Agency, which provides insurance and risk management services to about 40 percent of the Florida nursing home market. Mr. Parnell testified that during the audit period, it was impossible for nursing homes to obtain insurance in Florida. In his opinion, Petitioners could not have purchased commercial insurance during the audit period. To support this testimony, Petitioners offered a study conducted by the Florida Department of Insurance ("DOI") in 2000 that attempted to determine the status of the Florida long-term care liability insurance market for nursing homes, assisted living facilities, and continuing care retirement communities. Of the 79 companies that responded to DOI's data call, 23 reported that they had provided GL/PL coverage during the previous three years but were no longer writing policies, and only 17 reported that they were currently writing GL/PL policies. Six of the 17 reported writing no policies in 2000, and five of the 17 reported writing only one policy. The responding insurers reported writing a total of 43 policies for the year 2000, though there were approximately 677 skilled nursing facilities in Florida. On March 1, 2004, the Florida Legislature's Joint Select Committee on Nursing Homes issued a report on its study of "issues regarding the continuing liability insurance and lawsuit crisis facing Florida's long-term care facilities and to assess the impact of the reforms contained in CS/CS/CS/SB 1202 (2001)."6 The study employed data compiled from 1999 through 2003. Among the Joint Select Committee's findings was the following: In order to find out about current availability of long-term care liability insurance in Florida, the Committee solicited information from [the Office of Insurance Regulation, or] OIR within the Department of Financial Services, which is responsible for regulating insurance in Florida. At the Committee's request, OIR re-evaluated the liability insurance market and reported that there has been no appreciable change in the availability of private liability insurance over the past year. Twenty-one admitted insurance entities that once offered, or now offer, professional liability coverage for nursing homes were surveyed by OIR. Six of those entities currently offer coverage. Nine surplus lines carriers have provided 54 professional liability policies in the past year. Representatives of insurance carriers that stopped providing coverage in Florida told OIR that they are waiting until there are more reliable indicators of risk nationwide to re-enter the market. Among the Joint Select Committee's conclusions was the following: In the testimony the Committee received, there was general agreement that the quality of care in Florida nursing homes is improving, in large part due to the minimum staffing standards the Legislature adopted in SB 1202 during the 2001 Session. There was not, however, general agreement about whether or not lawsuits are abating due to the tort system changes contained in SB 1202. There was general agreement that the long-term care liability insurance market has not yet improved. After hearing the testimony, there is general agreement among the members of the Joint Select Committee that: * * * General and professional liability insurance, with actual transfer-of-risk, is virtually unavailable in Florida. "Bare- bones" policies designed to provide minimal compliance with the statutory insurance requirement are available; however, the cost often exceeds the face value of the coverage offered in the policy. This situation is a crisis which threatens the continued existence of long-term care facilities in Florida. To further support Mr. Parnell's testimony, Petitioners offered actuarial analyses of general and professional liability in long-term care performed by AON Risk Consultants, Inc. (AON) on behalf of the American Health Care Association. The AON studies analyzed nationwide trends in GL/PL for long-term care, and also examined state-specific issues for eight states identified as leading the trends in claim activity, including Florida. They provided an historical perspective of GL/PL claims in Florida during the audit period. The 2002 AON study for Florida was based on participation by entities representing 52 percent of all Florida nursing home beds. The study provided a "Loss Cost per Occupied Bed" showing GL/PL liability claims losses on a per bed basis. The 2002 study placed the loss cost for nursing homes in Florida at $10,800 per bed for the year 2001. The 2003 AON study, based on participation by entities representing 54 percent of Florida nursing home beds, placed the loss cost for nursing homes in Florida at $11,810 per bed for the year 2002. The studies showed that the cost per bed of GL/PL losses is materially higher in Florida than the rest of the United States. The nationwide loss per bed was $2,360 for the year 2001 and $2,880 for the year 2002. The GL/PL loss costs for Texas were the second-highest in the country, yet were far lower than the per bed loss for Florida ($5,460 for the year 2001 and $6,310 for the year 2002). Finally, Petitioners point to the Mature Care Policies as evidence of the crisis in GL/PL insurance availability. The aforementioned SB 1202 instituted a requirement that nursing homes maintain liability insurance coverage as a condition of licensure. See Section 22, Chapter 2001-45, Laws of Florida, codified at Subsection 400.141(20), Florida Statutes. To satisfy this requirement, Petitioners entered the commercial insurance market and purchased insurance policies for each of the 14 Palm Gardens facilities from a carrier named Mature Care Insurance Company. The policies carried a $25,000 policy limit, with a policy premium of $34,000. These were the kind of "bare bones" policies referenced by the Joint Select Committee's 2004 report. The fact that the policies cost more than they could ever pay out led Mr. Swindling, Petitioners' health care accounting and Medicaid reimbursement expert, to opine that a prudent nursing home operator in Florida at that time would not have purchased insurance, but for the statutory requirement.7 The Mature Care Policies were "bare bones" policies designed to provide minimal compliance with the statutory liability insurance coverage requirement. The policies cost Petitioners more than $37,000 in premium payments, taxes, and fees, in exchange for policy limits of $25,000. In its examination, AHCA disallowed the difference between the cost of the policy and the policy limits, then prorated the allowable costs because the audit period was nine months long and the premium paid for the Mature Care Policies was for 12 months. AHCA based its disallowance on Section 2161.A of the Manual, particularly the language which states: "Insurance premiums reimbursement is limited to the amount of aggregate coverage offered in the insurance policy." Petitioners responded that they did not enter the market and voluntarily pay a premium in excess of the policy limits. They were statutorily required to purchase this minimal amount of insurance; they were required to purchase a 12-month policy; they paid the market price8; and they should not be penalized for complying with the statute. Petitioners contend they should be reimbursed the full amount of the premiums for the Mature Care Policies, as their cost of statutory compliance. Returning to the issue of the contingent liabilities, Petitioners contend that, in light of the state of the market for GL/PL liability insurance during the audit period, AHCA should have gone beyond the strictures of the Manual to conclude that GAAP principles render the accrued contingent liabilities an allowable expense. Under GAAP, a contingent loss is a loss that is probable and can be reasonably estimated. An estimated loss from a loss contingency may be accrued by a charge to income. Statement of Financial Accounting Standards No. 5 ("FAS No. 5"), Accounting for Contingencies, provides several examples of loss contingencies, including "pending or threatened litigation" and "actual or possible claims and assessments." Petitioners assert that the contingent losses reported in their cost reports were actual costs incurred by Petitioners. The AICPA Audit and Accounting Guide for Health Care Organizations, Section 8.05, provides: The ultimate costs of malpractice claims, which include costs associated with litigating or settling claims, are accrued when the incidents that give rise to the claims occur. Estimated losses from asserted and unasserted claims are accrued either individually or on a group basis, based on the best estimates of the ultimate costs of the claims and the relationship of past reported incidents to eventual claims payments. All relevant information, including industry experience, the entity's own historical experience, the entity's existing asserted claims, and reported incidents, is used in estimating the expected amount of claims. The accrual includes an estimate of the losses that will result from unreported incidents, which are probable of having occurred before the end of the reporting period. Section 8.10 of AICPA Guide provides: Accrued unpaid claims and expenses that are expected to be paid during the normal operating cycle (generally within one year of the date of the financial statements) are classified as current liabilities. All other accrued unpaid claims and expenses are classified as non-current liabilities. As noted above, Petitioners' audited financial statements for the fiscal years ending December 31, 2002, and December 31, 2003, showed that the accrual was incurred and recorded by Petitioners during the audit period. Mr. Swindling prepared Petitioners' cost reports, based on information provided by Petitioners, including trial balances reflecting their costs, statistics on patient days, cost data related to square footage, and revenue information. Mr. Swindling advised Petitioners to include the accrued losses. He believed that the loss contingency was probable and could be reasonably estimated. The losses were probable because it was "a given in the state of Florida at that time period that nursing homes are going to get sued." Mr. Swindling testified that the accrual reflected a per bed loss amount of $1,750, which he believed to be a reasonable estimate of the contingent liabilities faced by Petitioners during the audit period. This amount was much less than the per bed loss indicated by the AON studies for Florida. Mr. Swindling used the criteria set forth in Section 8.05 of the AICPA Guide to establish the estimate. He determined that the lesser amount was adequate based on his discussions with Petitioners' management, who indicated that they had a substantial risk management program. Management also disclosed to Mr. Swindling that Petitioners' leases required $1,750 per bed in liability coverage. See Finding of Fact 22, supra. Mr. Swindling believed that the estimated loss per bed was reasonable based on the AON studies and his knowledge and experience of the state of the industry in Florida during the audit period, as further reflected in the DOI and Joint Committee on Nursing Homes materials discussed above. Mr. Swindling's opinion was that the provisions of the Manual relating to GL/PL insurance costs do not apply under these circumstances. The costs at issue in this proceeding are not general and professional liability insurance costs subject to CMS Pub. 15-1; rather, they are loss contingencies related to general and professional liability, including defense costs, litigation costs, and settlement costs. Mr. Swindling placed the loss contingency under number 730810, "General and Professional Liability -- Third Party" because, in the finite chart of accounts provided by Medicaid, that was the most appropriate place to record the cost.9 Despite the initial confusion it caused the agency's auditors, the placement of the loss contingency under number 730810 was not intended to deceive the auditors. Mr. Swindling opined that, under these circumstances, Sections 2160 through 2162 are in conflict with other provisions in the Manual relating to the "prudent buyer" concept, and further conflict with the Plan to the extent that the cited regulations "relate to a retrospective system as opposed to prospective target rate-based system." Mr. Swindling agreed that the application of Sections 2160 through 2162 to the situation presented by Petitioners would result in the disallowance of the loss contingencies. Mr. Swindling observed, however, that Sections 2160 through 2162 are Medicare regulations. Mr. Swindling testified that Medicare reimbursements are made on a retrospective basis.10 Were this situation to occur in Medicare -- in which the provider did not obtain commercial insurance, self-insurance, or establish a captive insurer -- the provider would be deemed to be operating on a pay-as-you-go basis. Though its costs might be disallowed in the current period, the provider would receive reimbursements in subsequent periods when it could prove actual payment for its losses. Mr. Swindling found a conflict in attempting to apply these Medicare rules to the prospective payment system employed by Florida Medicaid, at least under the circumstances presented by Petitioners' case. Under the prospective system, once the contingent loss is disallowed for the base period, there is no way for Petitioners ever to recover that loss in a subsequent period, even when the contingency is liquidated. During his cross-examination, Mr. Swindling explained his position as follows: . . . Medicare allows for that payment in a subsequent period. Medicaid rules would not allow that payment in the subsequent period; therefore you have conflict in the rules. When you have conflict in the rules, you revert to generally accepted accounting principles. Generally accepted accounting principles are what we did. Q. Where did you find that if there's a conflict in the rules, which I disagree with, but if there is a conflict in the rules, that you follow GAAP? Where did you get that from? I mean, we've talked about it and it's clear on the record that if there is no provision that GAAP applies, but where did you get that if there's a conflict? Just point it out, that would be the easiest way to do it. A. The hierarchy, if you will, requires providers to file costs on the accrual basis of accounting in accordance with generally accepted accounting principles. If there's no rules, in absence of rules -- and I forget what the other terms were, we read it into the record before, against public policy, those kind of things -- or in my professional opinion, if there is a conflict within the rules where the provider can't follow two separate rules at the same time, they're in conflict, then [GAAP] rules what should be recorded and what should be reimbursed. * * * Q. [T]he company accrued a liability of $2 million for the cost reporting period of 2002-2003, is that correct? A. Yes. * * * Q. Do you have any documentation supporting claims paid, actually paid, in 2002-2003 beyond the mature care policy for which that $2 million reserve was set up? A. No. Q. So what did Medicaid pay for? A. Medicaid paid the cost of contingent liabilities that were incurred by the providers and were estimated at $1,750 per bed. Generally accepted accounting principles will adjust that going forward every cost reporting period. If that liability in total goes up or down, the differential under [GAAP] goes through the income statement, and expenses either go up or they go down. It's self-correcting, which is similar to what Medicare is doing, only they're doing it on a cash basis. Mr. Swindling explained the "hierarchy" by which allowable costs are determined. The highest governing law is the Federal statutory law, Title XIX of the Social Security Act, 42 U.S.C. Subsection. 1396-1396v. Below the statute come the federal regulations for implementing Title XIX, 42 C.F.R. parts 400-426. Then follow in order Florida statutory law, the relevant Florida Administrative Code provisions, the Plan, the Manual, and, at the bottom of the hierarchy, GAAP. Mr. Swindling testified that in reality, a cost report is not prepared from the top of the hierarchy down; rather, GAAP is the starting point for the preparation of any cost report. The statutes, rules, the Plan and the Manual are then consulted to exclude specific cost items otherwise allowable under GAAP. In the absence of an applicable rule, or in a situation in which there is a conflict between rules in the hierarchy such that the provider is unable to comply with both rules, the provider should fall back on GAAP principles as to recording of costs and reimbursement. John A. Owens, currently a consultant in health care finance specializing in Medicaid, worked for AHCA for several years up to 2002, in positions including administrator of the audit services section and bureau chief of the Office of Medicaid Program Analysis. Mr. Owens is a CPA and expert in health care accounting and Medicare/Medicaid reimbursement. Mr. Owens agreed with Mr. Swindling that AHCA's disallowance of the accrued costs for GL/PL liability was improper. Mr. Owens noted that Section 2160 of the Manual requires providers to purchase commercial insurance. If commercial insurance is unavailable, then the Manual gives the provider two choices: self-insure, or establish a captive program. Mr. Owens testified that insurers were fleeing the state during the period in question, and providers were operating without insurance coverage. Based on the state of the market, Petitioners' only options would have been to self-insure or establish a captive. As to self-insurance, Petitioners' problem was that they had taken over the leases on their facilities from a bankrupt predecessor, Integrated Health Services ("IHS"). Petitioners were not in privity with their predecessor. Petitioners had no access to the facilities' loss histories, without which they could not perform an actuarial study or engage a fiduciary to set up a self-insurance plan.11 Similarly, setting up a captive would require finding an administrator and understanding the risk exposure. Mr. Owens testified that a provider would not be allowed to set up a captive without determining actuarial soundness, which was not possible at the time Petitioners took over the 14 IHS facilities. Thus, Petitioners were simply unable to meet the standards established by the Manual. The options provided by the Manual did not contemplate the unique market situation existing in Florida during the audit period, and certainly did not contemplate that situation compounded by the problems faced by a new provider taking over 14 nursing homes from a bankrupt predecessor. Mr. Owens agreed with Mr. Swindling that, under these circumstances, where the requirements of the Manual could not be met, Petitioners were entitled to seek relief under GAAP, FAS No. 5 in particular. In situations where a loss is probable and can be measured, then an accounting entry may be performed to accrue and report that cost. Mr. Owens concluded that Petitioners' accrual was an allowable cost for Medicaid purposes, and explained his rationale as follows: My opinion is, in essence, that since they could not meet -- technically, they just could not meet those requirements laid out by [the Manual], they had to look somewhere to determine some rational basis for developing a cost to put into the cost report, because if they had chosen to do nothing and just moved forward, those rates would be set and there would be nothing in their base year which then establishes their target moving forward. So by at least looking at a rational methodology to accrue the cost, they were able to build something into their base year and have it worked into their target system as they move forward. Steve Diaczyk, an audit evaluation and review analyst for AHCA, testified for the agency as an expert in accounting, auditing, and Medicaid policy. Mr. Diaczyk was the AHCA auditor who reviewed the work of Smiley & Smiley for compliance with Medicaid rules and regulations, and to verify the accuracy of the independent CPA's determinations. Mr. Diaczyk agreed with Mr. Swindling's description of the "hierarchy" by which allowable costs are determined. Mr. Diaczyk affirmed that Petitioners employed GAAP rather than Medicaid regulations in preparing their cost reports. Mr. Diaczyk testified regarding the Notes to Petitioners' audited financial statements, set forth at Findings of Fact 22-24, supra, which left AHCA's auditors with the understanding that Petitioners were self-insuring. Mr. Diaczyk pointed out that Section 2162.7 of the Manual requires a self- insurer to contract with an independent fiduciary to maintain a self-insurance fund, and that the fund must contain monies sufficient to cover anticipated losses. The fiduciary takes title to the funds, the amount of which is determined actuarially. Mr. Diaczyk explained that, in reimbursing a provider for self-insurance, Medicaid wants to make sure that the provider has actually put money into the fund, and has not just set up a fund on its books and called it "self-insurance" for reimbursement purposes. AHCA's position is that it would be a windfall for a provider to obtain reimbursement for an accrued liability when it has not actually set the money aside and funded the risk. Medicaid wants the risk transferred off of the provider's books and on to the self-insurance fund. Mr. Diaczyk testified as to the differing objectives of Medicaid and GAAP. Medicaid is concerned with reimbursing costs, and is therefore especially sensitive regarding the overstatement of costs. Medicaid wants to reimburse a provider for only those costs that have actually been paid. GAAP, on the other hand, is about report presentation for a business entity and is concerned chiefly with avoiding the understatement of expenses and overstatement of revenue. Under GAAP, an entity may accrue a cost and not pay it for years. In the case of a contingent liability, the entity may book the cost and never actually pay it. Mr. Diaczyk described the self-insurance and liquidation provisions of 42 C.F.R. Section 413.100, "Special treatment of certain accrued costs." The federal rule essentially allows accrued costs to be claimed for reimbursement, but only if they are "liquidated timely." Subsection (c)(2)(viii) of the rule provides that accrued liability related to contributions to a self-insurance program must be liquidated within 75 days after the close of the cost reporting period. To obtain reimbursement, Petitioners would have had to liquidate their accrued liability for GL/PL insurance within 75 days of the end of the audit period. Mr. Diaczyk also noted that, even if the 75-day requirement were not applicable, the general requirement of Section 2305.2 of the Manual would apply. Section 2305.2 requires that all short-term liabilities must be liquidated within one year after the end of the cost reporting period in which the liability is incurred, with some exceptions not applicable in this case. Petitioners' accrued liability for general and professional liability insurance was not funded or liquidated for more than one year after the cost reporting period. It was a contingent liability that might never be paid. Therefore, Mr. Diaczyk stated, reimbursement was not in keeping with Medicaid's goal to reimburse providers for actual paid costs, not for potential costs that may never be paid. Petitioners responded that their accrued liabilities constituted non-current liabilities, items that under normal circumstances will not be liquidated within one year. Mr. Parnell testified that there is great variation in how long it takes for a general and professional liability claim against a nursing home to mature to the point of payment to the claimant. He testified that a "short" timeline would be from two to four years, and that some claims may take from eight to eleven years to mature. From these facts, Petitioners urge that 42 C.F.R. Section 413.100 and Section 2305.2 of the Manual are inapplicable to their situation. As to Section 2305.2 in particular, Petitioners point to Section 2305.A, the general liquidation of liabilities provision to which Section 2305.2 provides the exceptions discussed above. The last sentence of Section 2305.A provides that, where the liability is not liquidated within one year, or does not qualify under the exceptions set forth in Sections 2305.1 and 2305.2, then "the cost incurred for the related goods and services is not allowable in the cost reporting period when the liability is incurred, but is allowable in the cost reporting period when the liquidation of the liability occurs." (Emphasis added.) Petitioners argue that the underscored language supports the Medicare/Medicaid distinction urged by Mr. Swindling. In its usual Medicare retroactive reimbursement context, Section 2305.2 would operate merely to postpone reimbursement until the cost period in which the liability is liquidated. Applied to this Medicaid prospective reimbursement situation, Section 2305.2 would unfairly deny Petitioners any reimbursement at all by excluding the liability from the base rate. Mr. Diaczyk explained that, where the Medicaid rules address a category of costs, the allowable costs in a provider's cost report are limited to those defined as allowable by the applicable rules. He stated that if there is a policy in the Manual that addresses an item of cost, the provider must use the Manual provision; the provider cannot use GAAP to determine that cost item. In this case, Mr. Diaczyk agreed with Ms. Smiley as to the applicable rules and the disallowance of Petitioners' contingent liability costs. According to Mr. Diaczyk, GAAP may be used only if no provisions farther up the chain of the "hierarchy" are applicable. In this case, the Medicaid rules specifically addressed the categories of cost in question, meaning that GAAP did not apply. Under cross-examination, Mr. Diaczyk testified that the accrual made by Petitioners in their cost reports would be considered actual costs under GAAP, "[a]ssuming that they had an actuarial study done to come up with the $1.7 million that they accrued." Mr. Diaczyk acknowledged that AICPA Audit and Accounting Guide for Health Care Organizations, Section 8.05, does not limit the provider to an actuarial study in estimating losses from asserted and unasserted claims. See Finding of Fact 49, supra, for text of Section 8.05. Mr. Diaczyk pointed out that the problem in this case was that Petitioners gave AHCA no documentation to support their estimate of the accrual, despite the auditor's request that Petitioners provide documentation to support their costs. Mr. Diaczyk's testimony raised a parallel issue to Mr. Swindling's concern that Medicaid's prospective targeting system permanently excludes any item of cost not included in the base rate. Mr. Swindling solved the apparent contradiction in employing Medicare rules in the Medicaid scenario by applying GAAP principles. Responding to the criticism that GAAP could provide a windfall to Petitioners by reimbursing them for accrued costs that might never actually result in payment, Mr. Swindling responded that GAAP principles would adjust the cost for contingent liabilities going forward, "truing up" the financial statements in subsequent reporting periods. This truing up process would have the added advantage of obviating the agency's requirement for firm documentation of the initial accrual. Mr. Swindling's "truing up" scenario under GAAP would undoubtedly correct Petitioners' financial statements. However, Mr. Swindling did not explain how the truing up of the financial statements would translate into a correction of Petitioners' reimbursement rate.12 If costs excluded from the base rate cannot be added to future rate adjustments, then costs incorrectly included in the base rate would also presumably remain in the facility's rate going forward.13 Thus, Mr. Swindling's point regarding the self-correcting nature of the GAAP reporting procedures did not really respond to AHCA's concerns about Petitioners' receiving a windfall in their base rate by including the accrual for contingent liabilities. On April 19, 2005, Petitioners entered into a captive insurance program. Petitioners' captive is a claims-made GL/PL policy with limits of $1 million per occurrence and $3 million in the aggregate. Under the terms of the policy, "claims-made" refers to a claim made by Petitioners to the insurance company, not a claim made by a nursing home resident alleging damages. The effective date of the policy is from April 21, 2005, through April 21, 2006, with a retroactive feature that covers any claims for incidents back to June 29, 2002, a date that corresponds to Petitioners' first day of operation and participation in the Medicaid program. The Petitioners' paid $3,376,906 for this policy on April 22, 2005. Mr. Parnell testified that April 2005 was the earliest time that the 14 Palm Gardens facilities could have established this form of insurance program. In summary, the evidence presented at the hearing regarding the contingent liabilities established that Petitioners took over the 14 Palm Gardens facilities after the bankruptcy of the previous owner. Petitioners were faced with the virtual certainty of substantial GL/PL expenses in operating the facilities, and also faced with a Florida nursing home environment market in which commercial professional liability insurance was virtually unavailable. Lacking loss history information from their bankrupt predecessor, Petitioners were unable to self-insure or establish a captive program until 2005. Petitioners understood that if they did not include their GL/PL expenses in their initial cost report, those expenses would be excluded from the base rate and could never be recovered. Petitioners' leases for the facilities required them to fund a self-insurance reserve at a per bed minimum amount of $1,750. Based on the AON studies and the general state of the industry at the time, Petitioners' accountant concluded that, under GAAP principles, $1,750 per bed was a reasonable, conservative estimate of Petitioners' GL/PL loss contingency exposure for the audit period.14 Based on all the evidence, it is found that Petitioners' cost estimate was reasonable and should be accepted by the agency. Petitioners included their GL/PL loss contingency expenses in their initial Medicaid cost report, placing those expenses under a heading indicating the purchase of insurance from a third party. The notes to Petitioners' audited financial statements stated that the facilities were "essentially self- insured." These factors led AHCA to request documentation of Petitioners' self-insurance. Petitioners conceded that they were not self-insured and carried no liability insurance aside from the Mature Care policies. The parties had little dispute as to the facts summarized above. The parties also agreed as to the applicability of the "hierarchy" by which allowable costs are determined. Their disagreement rests solely on the manner in which the principles of the hierarchy should be applied to the unique situation presented by Petitioners in these cases.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that AHCA enter a final order that allows Petitioners' accrual of expenses for contingent liability under the category of general and professional liability ("GL/PL") insurance, and that disallows the Mature Care policy premium amounts in excess of the policy limits, prorated for a nine- month period. DONE AND ENTERED this 24th day of October, 2008, in Tallahassee, Leon County, Florida. S LAWRENCE P. STEVENSON Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 24th day of October, 2008.
Findings Of Fact Upon consideration of the oral and documentary evidence adduced at the hearing, the following relevant facts are found: At all times relevant to this proceeding, respondent William J. Hartnett, Sr. was licensed as an ordinary life including disability, general lines, surplus lines and disability insurance agent. He has been in the insurance business since 1942 and was first licensed in 1947. Respondent originally organized the Southern American Fire Insurance Company. For the first year or so, he was its sole employee on a nonsalary basis and was nonsalaried for the first ten years of the company's operation. From 1965 on, respondent did not hold a 220 lines license with Southern American, as he did with other insurance entities. Respondent did not sign policies as agent for Southern American. With Southern American, respondent acted as a general agent and was authorized by the board of directors to receive a five percent override commission on the total volume of business. On or about October 27, 1975, a seizure order was entered by the Circuit Court of Leon County which directed the Florida Department of Insurance to take over the business and financial affairs of Southern American. This company has since gone into liquidation pursuant to Chapter 631, Florida Statutes. The Southern American March 31 and June 30, 1975, quarterly statements were prepared by Mr. R.L. Huard, the then assistant treasurer of Southern American, were signed by the respondent, and were filed with the Department of Insurance. The work papers for those statements had been approved by the respondent. Mr. Huard had been instructed by respondent when he was first hired in 1972 not to show on the quarterly statements the over 90-day old balances because they would all be "cleaned up" at the end of the year. Such balances had, in fact, been paid at the end of each of the two years that Mr. Huard was with the company up until the time the Department took over in 1975. It was the respondent's testimony that had the seizure order not been entered, the agencies' lines of credit would still have been open and that all balances could have been collected through September of 1975. The March 31, 1975, and June 30, 1975, quarterly statements of Southern American filed with the Department of Insurance reflected a substantial amount of agents' balances that at the time of reporting were over 90 days old. The elimination of such balances from those two statements would have left Southern American impaired under usual insurance accounting practices as reflected in the Florida Statutes. The over-90 day old agents' balances were due from agencies in which respondent had an interest as an officer, director or stockholder. In 1969, various officials of the Department of Insurance had discussions with the respondent regarding agents' balances which were over ninety days old. On or about December 28, 1973, respondent did deposit the proceeds of certain reinsurance treaties in the amount of $13,218.98 into the account of Southern American. This findings is determined from the testimony of respondent and from a copy of the check and a deposit slip received into evidence as Exhibit M. The deposit slip illustrates that the $13,218.96 check was one of two checks comprising a total deposit of $30,857.12. As a result of information made available to the parties shortly before the hearing, it was stipulated that there never was a direct reinsurance treaty between Southern American and Cottonbelt Insurance Company. It was further stipulated that Southern American did submit single risk policies on a facultative basis through General Aviation Insurance Brokers for Southern American to D.O. Howell and Company, Ltd., in London, England, which in turn placed policies so submitted with Cottonbelt through other brokers. The Department offered no other evidence concerning the checks amounting to $16,600.00 referred to in Count V. As noted above, respondent was authorized by the board of directors to receive as general agent for Southern American a five percent override on all premiums. He was also authorized to receive an annual salary and certain bonuses. For the years 1974 and 1975, respondent did not receive his total annual salaries. The total premium written in Southern American through North Star Insurance Agency from 1968 through 1975 was approximately $700,000.00. Monies owed Southern American by North Star were paid by checks made payable to the respondent, as agent. In his capacity as general agent of Southern American, respondent did receive funds in the approximate amount of $45,000.00 from subagent North Star in payment of premiums due Southern American on policies of insurance issued by Southern American through North Star. Such funds were not deposited into the account of Southern American by respondent, but were instead retained by respondent as an offset against commissions end salary due him from Southern American. This occurred in 1975. When the seizure order was entered in October of 1975, the monies due Southern American from North Star were carried on the books of Southern American as accounts receivable.
Recommendation Based upon the findings of fact and conclusions of law recited above, it is RECOMMENDED that the licenses of respondent to engage in the business of insurance be suspended for a period of six (6) months. Respectfully submitted and entered this 10th day of July, 1979, in Tallahassee, Florida. COPIES FURNISHED: Honorable William Gunter State Treasurer and Insurance Commissioner The Capitol Tallahassee, Florida 32301 S. Strom Maxwell, Esquire Department of Insurance Suite 428-A, Larson Building Tallahassee, Florida 32301 Robert J. Kelly, Esquire Rogers, Towers, Bailey, Jones and Gay Post Office Box 1872 Tallahassee, Florida 32302 DIANE D. TREMOR Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 10th day of July, 1979.
Findings Of Fact The Respondent, Teresa Jean Watson, at all times material to this proceeding was licensed as an ordinary life agent, a disability insurance agent and a general lines insurance agent. She was the only general lines agent licensed to sell insurance at the T. J. Watson Insurance Agency, Inc. and all insurance sold by that firm at times pertinent hereto was sold and issued under authority of her license. During times material to this proceeding, Teresa Jean Watson sold insurance coverage under authority of her general lines license either as direct agent for various insurance companies for whom she was general agent or, on behalf of MacNeill and Son, Inc. (MacNeill), her managing agency, which represented various insurance companies for whom the Respondent wrote coverage. Between February 1st and February 15, 1982, a homeowner's insurance policy was sold to Tony and Martha Williams by the Respondent's agency under the authority of the Respondent's general lines insurance agent's license. That homeowner's policy required a premium of $211.00. The policyholder, Tony Williams, wrote two checks to the T. J. Watson Agency dated January 22, 1982 and February 12, 1982. Those two checks totalled $174.00. The checks were cashed by the Respondent's agency on January 26, 1982 and on February 6, 1982. The Independent Fire Insurance Company issued the policy to Tony and Martha Williams and on August 4, 1982 a representative of the Independent Fire Insurance Company wrote the Respondent to advise her that she owed that company a balance of $179.35, as of May 1982. Petitioner asserts that the $179.35 represents the amount of Tony Williams' premium owed to the insurer, less the Respondent's commission, which if added together would equal the $211.00 premium on the Williams' policy. Although it was established that $179.35 was owed by the Respondent to the Independent Fire Insurance Company, and never paid, it was not established that it represented the premium due specifically for the Williams' policy as was charged in count 1 of the Administrative Complaint. For instance, the checks paid by the Williamses to the Watson Agency total $174.00 and therefore there is a discrepancy between the total of those checks and the $179.35 amount Independent Fire Insurance company was owed by the Respondent. This fact coupled with the fact that the dates on the checks from the Williamses (January and February) substantially predate the May 1982 billing date to Respondent from Independent Fire, renders it unproven that the checks written to the Watson Agency which Respondent negotiated and retained the benefit of, related to the amount of unremitted premium owed by Respondent to the Independent Fire Insurance Company. In short, it was established that $174.00 was paid the Respondent and her agency by the Williamses. But, it was not established that the premium paid by the Williamses became misappropriated fiduciary funds converted by the Respondent to her own use and benefit. It was merely established that as of May 1982 the Respondent owed the Independent Fire Insurance Company $179.35 as a past-due account It was not established that the Williamses ever suffered a lapse of insurance coverage or were otherwise harmed by the Respondent's failure to pay Independent Fire the $179.35. Indeed, the $179.35 figure was not proven to be more than a mere debt owed by Respondent to Independent Fire Insurance Company. The figure was not shown to have been related to any particular policy. The Respondent and her insurance agency in the regular course of business wrote insurance coverage for companies represented by MacNeill and Son, Inc., the Respondent's managing agency. The regular business practice between the Respondent and MacNeill was for the Respondent to write coverage on behalf of insurers represented by MacNeill and to remit on a regular open account" basis insurance premiums due MacNeill on behalf of its insurance company principals on a monthly basis. The Respondent became delinquent in submitting premiums to MacNeill and Son in November 1981. After unsuccessful efforts to collect the delinquent premium funds from the Respondent, MacNeill and Son, Inc. suspended T. J. Watson Insurance Agency and the Respondent from writing further coverage for companies they represented in January 1982. The Respondent purportedly sold her agency to one Thomas Zinnbauer in December 1981, but had already fallen into a pattern of failing to remit insurance premiums over to MacNeill before that time. In any event, the purported sale to Thomas Zinnbauer was a subterfuge to avoid collection of delinquent premiums inasmuch as the Respondent held herself out, in correspondence with MacNeill, (See Petitioner's Exhibit 4) to be the president of the agency at least as late as April 1982 and, at that time and thereafter, the agency continued to sell insurance under the aegis of the Respondent's license. After the Respondent made up the delinquency in premium remissions to the MacNeill Agency that agency restored her underwriting authority in January 1982. Shortly thereafter however, the Respondent and the T. J. Watson Agency again became delinquent in remitting insurance premiums to the MacNeill Agency and followed a quite consistent pattern of failing to forward these fiduciary funds to MacNeill for some months. Ultimately the Respondent and her agency failed to forward more than $6500.00 in premium payment funds to MacNeill and Son, Inc. as was required in the regular course of business. MacNeill and Son, Inc. made repeated futile attempts to secure the misappropriated premium payments from the Respondent and her agency. MacNeill made several accountings of the amount of the acknowledged debt to the Respondent. The Respondent communicated with MacNeill concerning the delinquent premium payments and acknowledged the fact of the debt, but sought to reach an amicable arrangement for a repayment schedule. Re- payment was never made, however, and ultimately the Petitioner agency was informed of the deficiencies and prosecution resulted. The Respondent knew that the premiums had been collected by herself and her agency and had not been forwarded to those entitled to them. She knew of and actively participated in the improper withholding of the premium payments. This withholding and diversion of premium payments from the agency and companies entitled to them was a continuing pattern of conduct and Respondent failed to take action to halt the misappropriation of the premium payments. Further, it is established by the testimony of Matthew Brewer, who investigated the delinquent premium accounts for MacNeill, that Ms. Watson failed to advise MacNeill of the purported sale of her agency until November of 1982, almost a year after it is supposed to have occurred and then only in response to Brewer's investigation. When confronted by Mr. Brewer concerning the ownership of her agency Ms. Watson refused to tell him to whom she had sold the agency. When Mr. Brewer learned that Thomas Zinnbauer had apparently bought the agency from the Respondent Mr. Brewer conferred with him and he refused to release the agency records unless Ms. Watson gave her permission. This fact, together with the fact that Ms. Watson held herself out as president of the agency some four months after she had purportedly sold the agency to Zinnbauer, establishes that Respondent, by representing to Brewer and other personnel of MacNeill and Sons, Inc. that she had sold her agency, was attempting to evade liability for failure to forward the fiduciary premium funds obtained under the authority of her agent's license. As a result of the failure to forward the above- mentioned premium payments some of the insureds who had paid those premiums suffered lapses in coverage and cancellations of policies because MacNeill and Company and the insurers they represented believed that no premiums had ever been paid. Ultimately, MacNeill and Company learned that the premiums had been paid by the policyholders, but not remitted by the Respondent and her agency and undertook steps to reinstate coverage, but those policyholders in some instances had substantial periods of time when their coverage was lapsed due to the Respondent's failure to remit the premium funds to the managing agency and the insurance companies involved. MacNeill and Company ultimately reimbursed the appropriate insurers and insureds at its own expense, incurring substantial financial detriment as a result of the Respondent's failure to have premium payments obtained under her licensed authority properly forwarded. Had the insureds who had their policies cancelled suffered losses for which claims could have been filed during the period of the lapses of coverage, they could have encountered substantial financial difficulty.
Recommendation Having considered the foregoing Findings of Fact and Conclusions of Law, the evidence of record, the candor and demeanor of the witnesses and the pleadings and arguments of the parties, it is therefore recommended that the General Lines Insurance Agent's license of Respondent Teresa Jean Watson be revoked. DONE and ORDERED this 27th day of December, 1985, in Tallahassee, Florida. P. MICHAEL RUFF Hearing Officer Division of Administrative Hearings 2009 Apalachee Parkway Tallahassee, Florida 32301 (904)488-9675 FILED with the Clerk of the Division of Administrative Hearings this 27th day of December, 1985. APPENDIX RULING OF PETITIONER'S PROPOSED FINDINGS OF FACT: Accepted. Accepted, although the amount represented by the two subject checks totalled $174.00 instead of $175.00. Accepted. Rejected as not comporting with the competent, substantial credible evidence adduced. Rejected inasmuch as it was not established that the amount of $179.35 owed the Independent Fire Insurance Company represented the premium on the Williamses' insurance policy. Accepted. Accepted. Accepted. Accepted, although the last sentence in that Proposed Finding constitutes, in reality, mere argument of counsel. Accepted. Rejected as not comporting with the competent, substantial credible testimony and evidence actually before the Hearing Officer. Accepted. Accepted. Accepted. Accepted. Accepted. Accepted. RULINGS ON RESPONDENT'S PROPOSED FINDINGS OF FACT: Respondent submitted a post-hearing document entitled "Proposed Findings of Fact." There are few actual Proposed Facts in that one-and-a-half page pleading which is interlaced throughout with argument of counsel. However, to the extent the six paragraphs of that document contain Proposed Findings of Fact they are ruled on as follows: This Proposed Finding is rejected, but for reasons delineated in the above Conclusions of Law, Count 1 has been recommended to be dismissed anyway. This Finding is accepted but is immaterial and irrelevant to, and not necessary to, the Findings of Fact reached herein and the Conclusions of Law based thereon. Paragraph Number 3 does not really constitute a Proposed Finding of Fact or even multiple Proposed Findings of Fact in the same paragraph. In reality, it constitutes argument of Respondent's counsel concerning admissibility of certain documents into evidence which have already been ruled to be admissible by the Hearing Officer during the course of the hearing. To the extent that the last two sentences in the third paragraph of the Respondent's Proposed Findings of Fact are proposed findings of fact, they are accepted, but are immaterial, irrelevant and unnecessary to the findings of fact made herein and the conclusions predicated thereon and recommendation made herein. Rejected as not being in accordance with the competent, substantial credible testimony and evidence adduced. Rejected as constituting mere argument of counsel and not being in accordance with the competent, substantial, credible evidence adduced. Rejected as not in accordance with the competent, substantial, credible evidence presented as to Count 2. In reality, counsel obviously intended to refer to the two checks referenced in Count 1 of the complaint which has been recommended to be dismissed anyway. COPIES FURNISHED: Dennis Silverman, Esquire Department of Insurance 413-B Larson Building Tallahassee, Florida 32301 Mark A. Steinberg, Esquire Post Office Box 2366 Ft. Myers, Florida 33902 Bill Gunter Insurance Commissioner and Treasurer The Capitol Tallahassee, Florida 32301
