The Issue Whether the recommended decision to award AXA Equitable Life Insurance Company ("AXA Equitable") a contract to provide 403(b) annuity retirement products to employees of Respondent, Broward County School Board ("School Board"), is clearly erroneous, arbitrary, capricious, contrary to competition, contrary to the School Board's governing statutes, rules or policies, or contrary to the specifications within Request for Proposal ("RFP") 15-010P; and, if so, whether Petitioner, Life Insurance Company of the Southwest ("LSW"), should be awarded a contract to provide annuity retirement products to School Board employees pursuant to the RFP.
Findings Of Fact LSW LSW is a life insurance company that sells fixed annuity deferred plans to school districts, hospitals, churches, governments, and other qualified employer plans. LSW is an active supplemental retirement benefit vendor in 5,300 school districts throughout the country. LSW serves 321,000 annuity policyholders with over $12.7 billion dollars invested.3/ LSW is a current provider of supplemental retirement benefits to the School Board, and it has over 3,700 existing School Board employees as policyholders with over $69 million dollars invested. The School Board's RFP for Annuities (RFP 15-010P) On March 4, 2014, the School Board issued its RFP entitled "403(b)/457(b) Program for School Board Employees," RFP 15-010P, for the purpose of soliciting replies from vendors seeking to provide tax sheltered annuity and/or mutual fund retirement products to the School Board's active, full-time employees (approximately 25,139 employees). The School Board issued Addendum No. 1 to the RFP on March 26, 2014. The retirement benefit products offered as a result of this procurement are optional and supplement the retirement benefits available to qualified School Board employees through the Florida State Retirement System. In issuing the RFP, the School Board seeks to "streamline its 403(b) and 457(b) offerings to a limited number of vendors in an effort to generally improve retirement awareness of all eligible employees and improve retirement savings of participating employees." The School Board seeks proposals with competitive fee and expense structures and minimal to no surrender charges and/or sales charges. The RFP does not limit the number of vendors that may be selected for negotiation or award. The RFP was developed by the School Board's Benefit and Employment Services Department in collaboration with its consultant, Gallagher Benefit Services ("Gallagher"). Gallagher has served as the School Board's consultant on insurance matters for over 20 years. The RFP describes the School Board's current landscape of nine current active annuity vendors, which offer fixed annuities, variable annuities, equity indexed annuities, and mutual funds. The current active annuity vendors include the three recommended annuity product awardees under the RFP (ING, VALIC, and AXA Equitable), as well as LSW. In addition, the School Board has 17 current inactive vendors with a total of 690 accounts.4/ The RFP provides that mutual fund proposals and annuity proposals will be evaluated and ranked separately. The RFP further provides that the School Board "at its sole option will then decide based on the top-ranked Proposer(s) in each category, if a sole provider or multiple providers with annuity and/or mutual fund options are more beneficial to SBBC and its employees." Under the RFP: "A sole provider is either one Awardee for both annuity and mutual fund products or is the only vendor for one of the product offerings. A multiple Awardee(s) is one of many vendors for the same product offerings." On or before April 17, 2014, at 2:00 p.m., the School Board's Supply Management and Logistics Department received proposals in response to the RFP. Proposals for the annuity products were submitted by AXA Equitable, Great American, Horace Mann, ING, LSW, MetLife, and VALIC. Six companies submitted proposals for mutual fund products. In addition, a proposal was submitted by Aspire Financial Services, LLC. The proposals for both annuities and mutual funds were delivered to the School Board's Superintendent's Insurance Advisory Committee ("Insurance Committee") members within two or three days of receipt by the School Board on April 17, 2014. Each of the proposals was several hundred pages in length and described as being roughly the size of a telephone book. The proposals were evaluated by the Insurance Committee. The Insurance Committee is a standing committee composed of persons appointed by the superintendent of schools, including representatives of various labor unions and "meet and confer" groups (populations of employees that are not represented by a labor union). The purpose of the Insurance Committee is to make recommendations regarding insurance matters including the subject RFP. The Insurance Committee regularly provides input in the development of the school district's competitive procurements for insurance and employee benefits and evaluates proposals for such services. No member of the Insurance Committee had any special expertise in mutual funds or annuities. There was a training session and review of the RFP at the Insurance Committee meetings on January 9 and 15, 2014. Section 5.1 of the RFP provides that the Insurance Committee: shall evaluate all Proposals received, which meet or exceed Section 4.2, Minimum Eligibility Requirements and Section 7.1 Indemnification, according to the following criteria: CATEGORY MAXIMUM POINTS A. Experience and Qualifications 10 B. Scope of Services 40 C. Cost of Services 40 D. Supplier Diversity & Outreach Program D.1. Participation 3 D.2. Diversity 4 D.3. Community Outreach 3 TOTAL[:] 100 Failure to respond, provide detailed information or to provide requested Proposal elements may result in the reduction of points in the evaluation process. The Committee may recommend the rejection of any Proposal containing material deviations from the RFP. The Committee may recommend waiving any irregularities and technicalities. "Cost of Services" is an integral part of the RFP. Section 4.7 of the RFP addresses Cost of Services and requires proposers of annuity products to submit their Cost of Services by completing the RFP's Attachment B1, Financial Response Form ("B1 form"). The B1 form requires a series of responses to various items relating to the Cost of Services offered for annuity products. The RFP and B1 form solicit two cost proposals, only: one for "Sole Carrier" and one for "Multiple Carrier." The B1 form has two columns: one for "Sole Carrier" and one for "Multiple Carrier." The RFP and B1 form do not allow for proposers to submit more than one multiple carrier proposal and to alter the B1 form to include an additional column for more than one multiple carrier proposal. The B1 form specifically advises proposers in bold letters that: "If you are proposing annuity product(s), please complete the following form for both being a sole carrier or one of multiple carriers." Reproduced below are the two pages of the B1 form included within the RFP: Section 4.7 of the RFP unequivocally warns: "No deviations from this form are permitted. No conditions or qualifications (e.g., participation requirements) to the quoted rates are acceptable." AXA Equitable's Non-Responsiveness Based on Its Alterations to the B1 Form and Two Multiple Vendor Proposals, and the Insurance Committee's Evaluation of AXA Equitable's Proposals, Recommendation, and Award Notwithstanding the RFP's admonition against alterations to the B1 form, AXA Equitable modified the B1 form in responding to the RFP by adding an additional column and providing two separate multiple carrier proposals. Significantly, AXA Equitable labeled its modified B1 form to provide the following three separate cost proposals: (1) "Sole Carrier"; (2) "Multiple Carrier (2-4 Investment Providers)"; and (3) "Multiple Carrier (2-4 Investment Providers)." Reproduced below are the two pages of the B1 form submitted by AXA Equitable: The last two columns of AXA Equitable's B1 form, although labeled the same, offer different costs for certain categories. Significantly, in the second column, AXA Equitable listed "0.50%" for "Mortality, Expense, and Administrative Charges." However, in the third column, AXA Equitable listed "0.70%" for "Mortality, Expense, and Administrative Charges." In the second column, AXA Equitable also listed a "5 year participant level" for "CDSC or Surrender Charges & Terms." However, in the third column, AXA Equitable listed a "10 year participant level" for "CDSC or Surrender Charges & Terms." The form in AXA's proposal for annuities was also mislabeled "Attachment B2," which is the form for mutual fund submissions. Although AXA Equitable provided information on the wrong form (B2 instead of B1), and mislabeled the second and third columns on its Attachment B2, the information within its response to the RFP made it clear to Gallagher that the second column on both pages was intended to contain AXA Equitable's two separate multiple carrier proposals. The second column on both pages was intended to contain AXA Equitable's two-to-four multiple vendor annuity proposal, and the third column on both pages was intended to contain AXA Equitable's five or more multiple vendor annuity proposal.5/ No other proposer altered the B1 form or submitted more than one multiple carrier proposal. At the hearing, the School Board conceded that it expected the proposers to complete the B1 form without deviation, and that no deviation should be permitted that would allow one vendor to obtain a competitive advantage over another vendor. The School Board conceded at the hearing that AXA Equitable deviated from the B1 form by including an additional column in the form for two separate multiple proposals that was unsolicited. Gallagher prepared executive summaries of the annuity and mutual fund proposals which assembled the proposers' verbatim responses in a side-by-side format corresponding to the RFP's evaluation scoring criteria. The Insurance Committee received these summaries about one week prior to their June 11, 2014, meeting at which a decision was to be made on the various proposals. The summaries for the annuity proposals were over 800 pages in length. A similar-sized comparison was prepared for the mutual fund proposals. The Insurance Committee met on June 11, 2014, to evaluate the annuity and mutual fund proposals. The meeting started at 10:30 a.m. and adjourned at 5:30 p.m., with a break for lunch. No proposal scoring was conducted before the meeting. The Insurance Committee determined at the start of its June 11, 2014, meeting that Aspire's proposal was non-responsive because it lacked the most recent three years of independent audited financial statements required by Section 4.2.5 of the RFP. Substantial discussion occurred during the June 11th meeting as to how to score AXA Equitable because of its two multiple vendor proposals. Some of the Insurance Committee members expressed concern over how to score AXA Equitable's annuity proposal because of its three separate proposals and modifications to the B1 form. In response, Gallagher recommended during the June 11, 2014, meeting that AXA Equitable be scored separately and have three separate scores. During the meeting, AXA Equitable was treated differently than all of the other annuity proposals, because each of the other annuity proposals were scored only twice while AXA Equitable receive three separate scores. Gallagher provided the Insurance Committee with a separate scoring sheet just for AXA Equitable because of its three separate proposals: one for sole carrier, another for two-to-four carriers, and the third proposal for five or more carriers. Once the Insurance Committee scored and ranked each of the proposals for all of the proposed annuity vendors, it was recommended that only then should the committee determine whether the award should be given to a sole vendor or to multiple vendors. At the conclusion of Gallagher's presentation on the annuity and mutual fund proposals, the Insurance Committee was given 20 to 30 minutes to score all of the proposals. Thirteen members of the Insurance Committee scored the proposals. The Insurance Committee's scores ranked the annuity proposals as follows: Sole Vendor Total ING 90 AXA Equitable 76.9 VALIC 74.2 MetLife 69.2 LSW 67.5 Great American 64.2 Horace Mann 61.0 Multiple Vendors Total ING 86.9 VALIC 71.2 AXA Equitable (based on its 2-4 vendor proposal) 69.7 LSW 67.0 AXA Equitable (based on its 5+ vendor proposal) 65.2 MetLife 64.7 Great American 61.9 Horace Mann 59.5 Thus, AXA Equitable's proposal was deemed responsive by the Insurance Committee, and it received three separate scores for its annuity proposals: a score of 76.9 for its sole vendor proposal; a score of 69.7 for its two-to-four vendor proposal; and a score of 65.2 for its five or more vendor proposal. The scoring sheets reflect that AXA Equitable received different scores for cost of services under its two multiple vendor proposals. Notably, nine of the Insurance Committee members scored AXA Equitable's two-to-four vendor proposal higher for cost of services than AXA Equitable's five or more vendor proposal for cost of services.6/ After seeing the rankings of the scores during the meeting, the committee proceeded to pass a motion authorizing negotiations between the committee and the top three ranked annuity vendors, only, until a successful negotiation with three annuity vendors is reached. Day two of the Insurance Committee's meeting (held June 12, 2014) consisted of negotiations between the Insurance Committee and the three highest ranked vendors for annuity and mutual fund products. After negotiating with the top three ranked proposers, the Insurance Committee members voted to award the contracts for annuities to ING, VALIC and AXA Equitable (under its two-to-four vendor proposal), as the three top-ranked responsive proposers with whom the Insurance Committee was able to successfully conduct contract negotiations. The Insurance Committee also voted to award the contracts for mutual fund services to ING, MetLife, and VALIC and to reject Aspire's proposal as non- responsive for failure to meet the RFP's minimum eligibility criteria. The superintendent accepted the Insurance Committee's recommendations. On June 16, 2014, the School Board's Supply Management and Logistics Department posted the School Board's intended recommendation for the award of the RFP. The intended decision is to: (a) award contracts for the provision of annuity programs to ING, VALIC, and AXA Equitable (under its two-to-four vendor proposal); (b) award contracts for the provision of mutual fund programs to ING, MetLife, and VALIC; and (c) to reject Aspire's proposal as being non-responsive for failure to meet the RFP's eligibility criteria. On June 17, 2014, LSW timely filed its Notice of Protest. On Monday, June 30, 2014, LSW filed its Formal Written Protest and Petition for Administrative Hearings and bid protest bond with the School Board. Because the School Board was closed on Friday, June 27, 2014, the formal written protest was timely filed on the School Board's next business day. No bid specification protest was filed concerning either the RFP or Addendum No. 1. AXA Equitable's alteration to the B1 form, which adds a third column and offers one sole vendor proposal and two separate multiple cost proposals, is non-responsive to the RFP and a material deviation. AXA Equitable's alteration to the B1 form affected its price by giving it the opportunity to fine-tune its bid and submit a third cost proposal that was not solicited. AXA Equitable's two multiple vendor proposals contained different charges. The charges for "Mortality, Expense, Administrative Charges" and "CDSC or Surrender Charges & Terms" were higher for AXA Equitable's five or more multiple vendor proposal than its two-to-four vendor proposal. AXA Equitable received three separate scores that were evaluated by the committee while all other annuity proposals received only two scores that were evaluated. Most of the committee members gave AXA Equitable higher scores for its two- to-four cost of services proposal than its five or more cost of services vendor proposal. AXA Equitable's two multiple vendor proposals, which contained different cost proposals, and which were scored separately, allowed AXA Equitable to receive an extra bite at the apple not afforded to any of the other vendors competing for the award and allowed AXA Equitable to gain an unfair competitive advantage over all of the other proposers. Nevertheless, the School Board contends there is no provision in the RFP which prohibits AXA Equitable from submitting more than one multiple vendor proposal, and that at best, AXA Equitable's alteration of the B1 form by adding a third column and submitting three separate proposals, each of which were scored separately, is a minor irregularity that can be waived. The School Board did not determine prior to the filing of LSW's bid protest that AXA Equitable's submission of two multiple proposals was a minor irregularity, and not a material deviation. At hearing, the School Board argued that AXA Equitable, or any other vendor for that matter, could have submitted an infinite number of multiple proposals. The School Board relies on the following language within Section 2.1 of the RFP, which states: SBBC is requesting Proposals with competitive fee and expense structures; minimal to no surrender charges and/or sales charges; performance and/or guaranteed returns that exceed objective benchmarks and peer groups; and education resources and tools that will help SBBC employees understand the importance of retirement savings and plan for the future. Proposers should propose an investment lineup that is in line with current trends in the 403(b) and 457(b) market. For example, group versus individual annuity products, open architecture mutual funds, and institutional share-classes. SBBC encourages the proposal of features that may or may not be offered today, such as designated Roth accounts, investment advice, managed portfolios, etc. At its sole option, SBBC reserves the right to annually review each Awardee and its product offerings for such things including, but not limited to: enrollment; fees and expenses; performance; and benchmarks. This language requests the submission of competitive cost proposals. In no way, however, does this language allow for the submission of more than one multiple vendor proposal and AXA Equitable's modifications to the B1 form by including an additional column and second multiple vendor proposal. The School Board also contends that AXA Equitable's alteration to the B1 form and submission of two multiple vendor proposals is authorized by language within Section 4.7 of the RFP that requires a proposer to complete a B1 form "for each program offered." This language, however, pertains to the requirement to disclose the costs for each type of annuity product offered. It does not allow the submission of a second multiple vendor proposal and AXA Equitable's modification to the B1 form by including an additional column and second multiple vendor proposal. The School Board also relies on Section 5.1 of the RFP, which states that the Insurance Committee "shall evaluate all Proposals received, which meet or exceed Section 4.2, Minimum Eligibility Requirements and Section 7.1 Indemnification." Section 4.2 of the RFP, entitled "Minimum Eligibility," provides as follows: Minimum Eligibility In order to be considered for award and to be further evaluated, Proposer must meet or exceed the following criteria as of the opening date of the Proposal. Proposer is responsible for providing the following information in its response. The Proposer must also include a statement of acknowledgement for each item below. Proposer must agree to the language in Section 7.1, Indemnification. Proposer must be licensed in the State of Florida. Provide a copy of the current license and/or certificate that allows Proposer to provide the services proposed. If Proposer is an insurance carrier, Proposer must be licensed to provide the proposed services in the State of Florida with an AM Best rating of A- or higher and financial size category of VI or larger. In the alternative to the foregoing AM Best and financial-size category, a licensed carrier may satisfy the requirements of 4.2.4. If Proposer is not an insurance company or lacks an AM Best or financial size category, Proposer must provide the most recent three (3) years available of independent, audited financial statements. Each Awardee will agree to provide SBBC an annual fee of $10 per active and inactive participant. Each Awardee will agree to provide an annual fee of $12 per active and inactive participant to fund third-party administrative services. The plain reading of Section 4.2 is that the phrase "following criteria" as used therein pertains to the critera within Section 4.2 (4.2.1, 4.2.2, 4.2.3, 4.2.4, 4.2.5, and 4.2.6), only. To accept the School Board's position would render meaningless the admonitions in Section 4.7 of the RFP and the B1 form against submitting more than one multiple vendor proposal and deviating from the form. Contrary to the School Board's contention, nothing in the RFP allows the alterations to the B1 form and submission of more than one multiple vendor proposal, as submitted by AXA Equitable. In fact, Section 4.7 of the RFP and the B1 form unequivocally prohibit it. To accept the School Board's argument would have allowed AXA Equitable or any other proposer to submit any number of separate multiple proposals with different costs of services and have each of them scored separately. Under the School Board's view, AXA Equitable could have submitted separate multiple vendors of say, for example, one-to-three providers; two-to-four providers; three-to-five providers; four-to-six providers; five-to-seven providers; eight-to-nine providers, etc. (each with different costs of services), until one of them hits and is a winner. The School Board's argument fails to consider that each multiple proposal allowed the committee to give AXA Equitable an extra look and opportunity to fine-tune its bid with the hope that one of its proposals would stand out to the committee and be chosen as a winner. That is precisely what happened in the instant case. Indeed, the Insurance Committee viewed each of AXA Equitable's multiple proposals as a separate proposal and scored them separately with different results. Only after each of the multiple proposals were viewed and scored did the committee then choose to negotiate with the companies that submitted the three topped-ranked proposals. The committee had the opportunity to view AXA Equitable's five or more proposal alongside its two-to-four proposal and sole provider proposal, view the scores from all the proposals, and then determine which way it wanted to go in terms of the number of vendors. After observing that AXA Equitable provided higher costs of services for its five or more proposal than its two-to- four proposal, most of the committee members gave AXA Equitable higher scores for its lower two-to-four cost proposal, and then the committee chose to go with the top three ranked proposals. The Insurance Committee had the opportunity to view AXA Equitable's two-to-four proposal and its five plus proposal separately, rank each of these proposals separately along with the one multiple proposals submitted by each of the other vendors, and then the committee was able to stack each of the proposals against each other, compare them, and decide to go with the top three. This clearly gave AXA Equitable a competitive advantage over the other proposals, which was prohibited by the RFP, and constitutes a material deviation that cannot be waived. AXA Equitable's Non-Responsiveness for Failure to Provide Cost Information Required by the RFP In addition, one of the questions asked in the B1 form was: "What is the Net Revenue Pricing for this plan in basis points?" For the sole carrier proposal, AXA Equitable stated that its net revenue pricing is 1.70. For each of its two multiple carrier proposals, however, AXA Equitable stated: "This would be higher than 1.70 if we are not the single provider." AXA Equitable failed to commit to a specific pricing in basis points for net revenue pricing in each of its two multiple carrier proposals. Net revenue pricing is material to the evaluation of a proposer's cost of services, yet AXA Equitable failed to sufficiently respond to this question on the B1 form in response to the RFP. Some of the Insurance Committee members did not understand what the phrase "net revenue pricing" meant or appreciate the significance of this omission from AXA Equitable's multiple vendor proposals. The evidence presented at hearing failed to establish that any of the committee members deducted points because AXA Equitable failed to provide net revenue pricing for its multiple vendor proposals. AXA Equitable's failure to provide net pricing in basis points in the B1 form for its multiple proposals constitutes a material deviation from the RFP, provided AXA Equitable with a competitive advantage, and is not a minor irregularity that can be waived. The proposers were required to provide the net revenue pricing for their annuity product cost offerings. Net revenue pricing is material to the cost of the services. Thus, AXA Equitable was non-responsive to the RFP by failing to include its net pricing in basis points for its multiple vendor proposals. Nevertheless, the School Board contends that AXA Equitable's omission of net revenue pricing is simply a factor that the committee could consider when scoring its cost proposal. The School Board relies upon Section 5.1 of the RFP, which provides that a "failure to respond, provide detailed information or to provide requested Proposal elements may result in the reduction of points in the evaluation process" and does not require a rejection of AXA Equitable's proposal. The School Board's reliance on Section 5.1 of the RFP is misplaced. The Insurance Committee members did not understand what the phrase "net revenue pricing" meant or appreciate the significance of this omission from the proposal. The evidence did not show that any of the members deducted points because of AXA Equitable's failure to provide net revenue pricing for its multiple carrier proposals. The School Board did not determine prior to the filing of LSW's bid protest that AXA Equitable's failure to provide net pricing in basis points in the B1 form for its multiple proposals was a minor irregularity, and not a material deviation. The Existence of Legacy Carriers Did Not Preclude Negotiations with the Three Top Ranked Annuity Vendors Alternatively, LSW contends that even if AXA Equitable's two-to-four vendor proposal is not rejected as non- responsive, the Insurance Committee lacked the authority to choose to negotiate with the three top-ranked annuity vendors given the number of "legacy carriers" (more than four) that can continue to participate in the payroll deduction even if not selected as a vendor going forward pursuant to the instant RFP. Although it is unnecessary for the undersigned to reach this issue, LSW's contention in this regard is without merit. A selection of the top three vendors in response to the instant RFP does not mean that the legacy carriers must be counted toward the number of vendors ultimately allowed to offer products under the instant RFP. Simply put, the legacy carriers and inactive vendors may continue to provide products to its existing employees alongside the top three vendors chosen pursuant to the instant RFP.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Broward County School Board enter a final order rescinding the proposed award to AXA Equitable for annuity products in favor of an award to LSW as the third-ranked responsive and responsible vendor for supplemental annuity retirement benefits. DONE AND ENTERED this 31st day of December, 2014, in Tallahassee, Leon County, Florida. S DARREN A. SCHWARTZ Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 31st day of December, 2014.
Conclusions THE PARTIES resolved all disputed issues and executed a Settlement Agreement. The parties are directed to comply with the terms of the attached settlement agreement. Based on the foregoing, this file is CLOSED. DONE and ORDERED on this the day of --+-h+----"-''----,,,'f---' Tallahassee, Florida. 200_, m Agency for Health Care Administration 1 Filed July 7, 2009 1:05 PM Division of Administrative Hearings. A PARTY WHO IS ADVERSELY AFFECTED BY THIS FINAL ORDER IS ENTITLED TO A JUDICIAL REVIEW WHICH SHALL BE INSTITUTED BY FILING ONE COPY OF A NOTICE OF APPEAL WITH THE AGENCY CLERK OF AHCA, AND A SECOND COPY ALONG WITH FILING FEE AS PRESCRIBED BYLAW, WITH THE DISTRICT COURT OF APPEAL IN THE APPELLATE DISTRICT WHERE THE AGENCY MAINTAINS ITS HEADQUARTERS OR WHERE A PARTY RESIDES. REVIEW PROCEEDINGS SHALL BE CONDUCTED IN ACCORDANCE WITH THE FLORIDA APPELLATE RULES. THE NOTICE OF APPEAL MUST BE FILED WITHIN 30 DAYS OF RENDITION OF THE ORDER TO BE REVIEWED. Copies furnished to: Karen Dexter, Esquire Agency for Health Care Administration (Laserfiche) Louise Jeroslow 6075 Sunset Drive, Suite 201 Miami, Florida 33143 (U.S. Mail) Claude B. Arrington Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 Ken Yon, Chief, Medicaid Program Integrity Fred Becknell, Medicaid Program Integrity Finance and Accounting CERTIFICATE OF SERVICE I HEREBY CERTIFY that a true and correct copy of the foregoing has been furnished to the above named addressees by U.S. Mail on this the f ;t , 200.?' Richard Shoop, Esquire Agency Clerk State of Florida Agency for Health Care Administration 2727 Mahan Drive, Building #3 Tallahassee, Florida 32308-5403 (850) 922-5873
The Issue The issues for determination in this case are whether Respondent violated the law as charged by Petitioner in its Administrative Complaint, and, if so, what discipline is appropriate.
Findings Of Fact Petitioner is the state agency with the statutory authority and duty to license and regulate insurance agents in Florida. Respondent holds license D033674 as a life and health insurance agent. At the time of the events which are the subject of this case, Respondent also held a license to sell securities. At the time of the events which are the subject of this case, Respondent was employed by First Liberty Group and sold life insurance, annuities, and viatical settlement purchase agreements ("viaticals"). A viatical is a written agreement which provides for an investor's purchase of an interest in the proceeds of a life insurance policy of an anonymous insured person, the "viator." The agreement provides for the amount of money that the investor will receive upon the death of the viator. One general principle underlying a viatical is that it provides a means for a terminally ill person who needs money to sell or assign the proceeds of a life insurance policy that would be paid upon his or her death. Another general principle is that the viator, due to the terminal illness, has been diagnosed to have a short life expectancy. Although the identity of the viator is not revealed to the investor, the investor is provided information about the viator's gender, age, illness, and life expectancy. Facts Common to All Counts A company that "viaticates" life insurance policies and arranges for diagnoses of life expectancies by medical doctors is called a "viatical settlement provider." For all the viaticals sold by Respondent, the viatical settlement provider was Mutual Benefits Corporation. Mutual Benefits Corporation was charged with and ultimately determined to have committed fraud with respect to its practices as a viatical settlement provider. The nature of the fraud was not made a part of the record in this case. Mutual Benefits Corporation was placed in a receivership to manage the remaining assets, liabilities, and contracts of the company. Respondent's employer, First Liberty Group, advertised that it offered a certificate of deposit (CD) at a very competitive annual interest rate. Potential customers who came in to inquire about or to purchase a CD were also informed about annuities and viaticals. Petitioner referred to this as a "bait and switch" technique. However, although the CD interest rate might have been the bait, there was no switch. Customers who wanted CDs were able to and did purchase CDs from First Liberty Group through Respondent at the advertised interest rate. Some customers also purchased annuities and viaticals. In the advertising materials provided to the investors by Respondent and in the Viatical Settlement Purchase Agreements signed by the investors, the amount the investors would receive upon the death of the insured is described as "fixed." For example, the return on an investment in a viaticated insurance policy for a viator with a three-year life expectancy was represented to be 42 percent. The 42 percent return was fixed in the sense that on an investment of $20,000, for example, the investor would receive 42 percent of $20,000, or $8,400, when the viator died. If the viator died six months after the purchase of the viatical, the investor would receive $8,400. If the viator died three years later, the investor would receive $8,400. If the viator died ten years later, the investor would receive $8,400. The viatical sales literature that Respondent gave to customers disclosed that the life expectancy of the viator, as determined by a doctor, was not guaranteed. Therefore, the amount of the return on the viatical investment was not fixed in the sense of an annual interest rate. In the examples given above, the annualized rate of return to the investor if the insured died six months later would be 84 percent (42 divided by .5 years). The annualized rate of return if the viator died three years later would be 14 percent (42 divided by 3 years). The annualized rate of return if the viator died ten years later would be 4.2 percent (42 divided by 10 years). Petitioner charged Respondent with not explaining to the investors that "the real rate of return on the investment was tied to the viator's date of death." However, Petitioner failed to prove this charge. Respondent did not tell the investors that the 42 percent return, for example, was an annual rate of return. The viatical sales materials provided to customers by Respondent did not describe the return on the investment as an annual rate of return. The effect that the date of the viator's death would have on the rate of return on the viatical is obvious. The sooner the viator died, the better the return; the later the viator died, the worse the return. The investors did not need specialized knowledge to understand this simple concept. No investor in this case said they did not understand that their return would be affected by when the viator died. None of the investors said they thought the "fixed rate" figure, such as 42 percent for a three-year viatical, was a guaranteed annual return. Each investor signed a Viatical Settlement Purchase Agreement that included a statement that the returns "are fixed and not annualized returns." (Emphasis in the original). Another factor affecting the actual return on a viatical investment is the possibility provided for under the terms of the viatical contract that the investor might have to pay a portion of the premiums on the life insurance policy in the event the viator lived longer than his or her life expectancy. Any payment of an insurance premium by the investor would cause a reduction in the return on the viatical investment. In the example given above, if the investor was required to pay $2,000 in premiums, his return on the $20,000 would no longer be $8,400, but only $6,400. The annualized return on the investment would be correspondingly reduced. In a worse case scenario, the possibility exists that the requirement to make premium payments could completely eliminate any potential return to the investor and even jeopardize the principal. The viatical advertising materials that Respondent provided to customers did not describe the possibility or impact of having to make premium payments as discussed above. The advertising materials generally downplayed the risks associated with a viatical. For example, one sales document described the viatical as appropriate for a conservative investor and suggested that viaticals are investments that provide "peace of mind." It was reasonable for Respondent and the sales materials to describe the insurance companies that issued the insurance policies as reliable and secure. However, it was not reasonable, nor accurate, to describe the viaticals as conservative investments because of the possibility that the insured person would live many years beyond his or her life expectancy and the possibility that the investor would have to make premium payments. Viaticals have the potential to provide a much better investment return than other types of investments. However, in conformance with the general rule that the higher the potential return on an investment, the greater the risk, the relatively high potential return on a viatical comes with a relatively high risk.1/ Respondent disclosed to the investors that there was a possibility they might have to make future premium payments, and it was described in paragraphs 20 and 21 of the Viatical Settlement Purchase Agreements signed by the investors under the heading "Payment of Future Premiums." The agreement states that the payment of insurance premiums beyond the life expectancy of the viator is at the discretion of Mutual Benefits Corporation. Respondent told the investors that Mutual Benefits Corporation had a reserve or escrow fund that was managed in a way that created a premium "pool" so that the early death of a viator provided a surplus of money that could be used to pay premiums on the insurance policies of viators who lived beyond their life expectancies. Respondent also told the investors that 85 percent of the viators died early, which created a large surplus in the escrow fund to pay future premiums. The viatical contracts, however, only stated that unused premiums "may" be retained in the reserve fund by Mutual Benefits Corporation. At some point after the investors involved in this case purchased viaticals from Respondent, Mutual Benefits Corporation was the subject of enforcement action for fraud and placed in receivership. There was evidently no longer a surplus or reserve fund to pay premiums on insurance policies associated with viators who lived beyond their life expectancy, and that burden fell on the investors. All the investors involved in this case told Respondent they were conservative investors with a low tolerance for risk. There is a commonality in their perceptions of viaticals derived from their discussions with Respondent, that viaticals were safe and conservative investments. However, viaticals are relatively risky investments due to their illiquidity and the fundamental conditions affecting the return and the security of the principal that are beyond the control of the investor. Respondent knew or should have known, through the exercise of reasonable diligence on behalf of the customers who purchased viaticals, that viaticals are relatively high-risk investments. Respondent misrepresented the risk character of viaticals in his discussions with the investors involved in this case. He had a motive to downplay the true risk character of the viaticals, because he received a commission for every sale of a viatical. If Respondent had informed the investors of the true risk character of viaticals, the investors might not have purchased the viaticals. The definition of "security" in Section 517.021, Florida Statutes, was amended in 2006 to specifically identify "viatical settlement investment" as a type of security. Respondent does not dispute that a viatical is a security. There is no dispute that the viaticals sold by Respondent, which are the subject of this case, were not registered securities when Respondent sold them in 2003. Count I - Simons Charles Simons was 81 years old in 2003. He has eight years of education. He used to work as a truck driver in a quarry associated with a cement plant, but is now retired. He owns real estate and has an annual income over $100,000 and a net worth of $600,000 to $700,000. Mr. Simons saw the CD advertised by First Liberty Group and came in with his wife to invest $100,000 he had acquired from the recent sale of real estate. They met with Respondent in July 2003. Mr. and Mrs. Simons invested $50,000 in two or more CDs and an annuity. They also purchased two viaticals for $50,000. Mr. and Mrs. Simons purchased two three-year viaticals, meaning that medical doctors who had purportedly examined the medical records of the insured persons expected them to die of their terminal illnesses within three years. The Simons invested $25,000 in each of the viaticals. Although four years have passed since the Simons purchased the three-year viaticals, neither of the insured persons has died. Mr. Simons has had to make a premium payment of approximately $2,000 on one of the underlying policies.2/ Count II – Lenois Allan Lenois was 70 years old in 2003. He is a high school graduate, studied accounting and taxation, and worked for a lumber company where he supervised 300 employees. His wife, Marion, was an accountant. They are now retired. In August 2003, Mr. and Mrs. Lenois went to see Respondent after seeing the CD advertisement in the newspaper. While in Respondent's office, they noticed a poster advertisement on the office wall about viaticals and asked Respondent about them. Mr. Lenois' deposition testimony that Respondent called the viaticals "guaranteed" is not persuasive, given Respondent's testimony at the final hearing that he used these kinds of words to describe the industry rating of the insurance companies involved and the federal-insured reserve fund account, not the viatical itself. However, as previously found, Respondent misrepresented the viaticals to be relatively conservative investments to all the investors. Mr. and Mrs. Lenois invested $20,000 in an annuity. In a deposition of Mr. Lenois, he stated that he thought he had purchased a CD from Respondent, not an annuity, and was surprised that he had to pay a surrender penalty. Petitioner makes this same allegation in its Proposed Recommended Order, but Mr. Lenois' testimony is not persuasive because he signed a disclosure document that states "I understand that I have purchased an annuity . . . and not a Bank Certificate of Deposit," and the word "annuity" is written on the personal check used to purchase the annuity. Furthermore, the allegation was not included in the Administrative Complaint. Mr. and Mrs. Lenois purchased one three-year viatical for $10,000. Although four years have passed since they purchased the viatical, the viator is still alive. Mr. and Ms. Lenois have not yet had to make a premium payment associated with their viatical. Count II – Luenberger Floy Leuenberger is a retired school teacher. She has a master's degree in counseling and education. Her husband is a retired bank employee. The Leuenbergers have a net worth just over $500,000. The Leuenbergers saw the CD advertised by First Liberty Group and came in to invest $75,000. They met with Respondent in October 2003. They saw a poster on the wall of Respondent's office about viaticals and asked Respondent about them. The Leuenbergers invested $50,000 in CDs and purchased two viaticals for $12,500 each. One of the viaticals purchased by the Leuenbergers "paid out" because the viator died, and they received the return Respondent quoted to them. The other viatical they purchased from Respondent has not yet paid out. The Leuenbergers have had to make a premium payment of approximately $1,500 on the remaining viatical. Count III – Berge Oscar Berge is retired from the United States Air Force and from a subsequent job as a maintenance supervisor for a health care facility. Mr. Berge obtained a college degree in avionics instrument technology while in the Air Force. Mr. Berge saw the CD advertised by First Liberty Group. He and his wife met with Respondent in late 2002 and, in January 2003, invested in two annuities and five viaticals. Mr. and Mrs. Berge purchased two three-year viaticals for $30,000 each and three five-year viaticals for $30,000 each; a total investment of $150,000. Although four years have passed since the Berges purchased the three-year viaticals, the two viators have not died. The Berges have had to make two premium payments totaling approximately $5,000.
Recommendation Based on the Findings of Fact and Conclusions of Law set forth above, it is RECOMMENDED that a final order be entered which finds that Respondent Bradley Kline violated Subsections 626.611(5), (7), (9), and (16) and 626.621(9), Florida Statutes, and revokes his license as an insurance agent. DONE AND ENTERED this 9th day of October, 2007, in Tallahassee, Leon County, Florida. S BRAM D. E. CANTER 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 9th day of October, 2007.
