The Issue At issue in this proceeding is whether proposed Florida Administrative Code Rule 69O-186.003(1)(c) constitutes an invalid exercise of delegated legislative authority.
Findings Of Fact Parties ATIF was established in 1948 by Florida lawyers in order to provide title insurance services to their clients. ATIF has over 6,000 member agents, all of whom are members of the Florida Bar issuing title insurance in private practice. ATIF issues policies exclusively through its member agents. Stewart Title is a title insurer operating in all 50 states. Stewart Title issues title insurance policies in Florida directly, through affiliated companies, and through independent agents. First American is a title insurer operating throughout the United States. It offers the JLP in states other than Florida, and sells the product directly, through independent agents, and through affiliated agents. As of 2007, approximately 27% of First American's business was written directly. The Financial Services Commission (the "Commission") serves as the agency head of OIR for purposes that include rulemaking. The Commission comprises the Governor, Attorney General, Chief Financial Officer, and Commissioner of Agriculture. § 20.121(3) and (3)(c), Fla. Stat. OIR is a structural unit of the Commission responsible for all activities concerning insurers and other risk bearing entities, including but not limited to licensing, rates and policy forms. The head of OIR is the Director, also known as the Commissioner of Insurance Regulation. § 20.121(3)(a)1, Fla. Stat. The JLP Title insurance is purchased to insure the purchaser (or his lender) against disputes regarding the ownership of a given piece of real property. Title insurance guarantees the transferability of the title to real property. The JLP is title insurance intended to cover "junior" mortgages, which include second mortgages and home equity loans. The JLP is intended to be less comprehensive and less expensive than a traditional owner's or lender's primary title insurance policy. The JLP ensures that the borrower is the last grantee of record for the property being used as collateral for the loan. It ensures that the tax payments are current, insures against any liens on the property, and ensures that the legal description on the policy is the same legal description found on the last deed of record.2 The JLP is not authorized for sale in the state of Florida because OIR has yet to approve a premium rate for this type of title insurance. As more fully explained below, ATIF and First American filed petitions in 2003 seeking OIR's approval of the forms and rates necessary for the issuance of the JLP, pursuant to Section 627.782, Florida Statutes. The Statute and Proposed Rule Title insurance contracts generally are governed by Chapter 627, Part XIII, Florida Statutes. Section 627.7711, Florida Statutes, provides the following definitions: As used in this part, the term: (1)(a) "Closing services" means services performed by a licensed title insurer, title insurance agent or agency, or attorney agent in the agent's or agency's capacity as such, including, but not limited to, preparing documents necessary to close the transaction, conducting the closing, or handling the disbursing of funds related to the closing in a real estate closing transaction in which a title insurance commitment or policy is to be issued. (b) "Primary title services" means determining insurability in accordance with sound underwriting practices based upon evaluation of a reasonable title search or a search of the records of a Uniform Commercial Code filing office and such other information as may be necessary, determination and clearance of underwriting objections and requirements to eliminate risk, preparation and issuance of a title insurance commitment setting forth the requirements to insure, and preparation and issuance of the policy. Such services do not include closing services or title searches, for which a separate charge or separate charges may be made. "Premium" means the charge, as specified by rule of the commission, that is made by a title insurer for a title insurance policy, including the charge for performance of primary title services by a title insurer or title insurance agent or agency, and incurring the risks incident to such policy, under the several classifications of title insurance contracts and forms, and upon which charge a premium tax is paid under s. 624.509. As used in this part or in any other law, with respect to title insurance, the word "premium" does not include a commission. "Title insurer" means any domestic company organized and authorized to do business under the provisions of chapter 624, for the purpose of issuing title insurance, or any insurer organized under the laws of another state, the District of Columbia, or a foreign country and holding a certificate of authority to transact business in this state, for the purpose of issuing title insurance. "Title search" means the compiling of title information from official or public records.[3] Section 627.782, Florida Statutes, titled "Adoption of Rates," provides as follows: Subject to the rating provisions of this code, the commission must adopt a rule specifying the premium to be charged in this state by title insurers for the respective types of title insurance contracts and, for policies issued through agents or agencies, the percentage of such premium required to be retained by the title insurer which shall not be less than 30 percent. However, in a transaction subject to the Real Estate Settlement Procedures Act of 1974, 12 U.S.C. ss. 2601 et seq., as amended, no portion of the premium attributable to providing a primary title service shall be paid to or retained by any person who does not actually perform or is not liable for the performance of such service. In adopting premium rates, the commission must give due consideration to the following: The title insurers' loss experience and prospective loss experience under closing protection letters and policy liabilities. A reasonable margin for underwriting profit and contingencies, including contingent liability under s. 627.7865, sufficient to allow title insurers, agents, and agencies to earn a rate of return on their capital that will attract and retain adequate capital investment in the title insurance business and maintain an efficient title insurance delivery system. Past expenses and prospective expenses for administration and handling of risks. Liability for defalcation. Other relevant factors. Rates may be grouped by classification or schedule and may differ as to class of risk assumed. Rates may not be excessive, inadequate, or unfairly discriminatory. The premium applies to each $100 of insurance issued to an insured. The premium rates apply throughout this state. The commission shall, in accordance with the standards provided in subsection (2), review the premium as needed, but not less frequently than once every 3 years, and shall, based upon the review required by this subsection, revise the premium if the results of the review so warrant. The commission may, by rule, require licensees under this part to annually submit statistical information, including loss and expense data, as the department determines to be necessary to analyze premium rates, retention rates, and the condition of the title insurance industry. Section 627.783, Florida Statutes, titled "Rate deviation," provides as follows: A title insurer may petition the office for an order authorizing a specific deviation from the adopted premium. The petition shall be in writing and sworn to and shall set forth allegations of fact upon which the petitioner will rely, including the petitioner's reasons for requesting the deviation. Any authorized title insurer, agent, or agency may join in the petition for like authority to deviate or may file a separate petition praying for like authority or opposing the deviation. The office shall rule on all such petitions simultaneously. If, in the judgment of the office, the requested deviation is not justified, the office may enter an order denying the petition. An order granting a petition constitutes an amendment to the adopted premium as to the petitioners named in the order, and is subject to s. 627.782. Section 627.7843, Florida Statutes, titled "Ownership and encumbrance reports," provides as follows: As used in this section, the term "ownership and encumbrance report" means a report that discloses certain defined documents imparting constructive notice and appearing in the official records relating to specified real property. An ownership and encumbrance report may not directly or indirectly set forth or imply any opinion, warranty, guarantee, insurance, or other similar assurance as to the status of title to real property. Any ownership and encumbrance report or similar report that is relied on or intended to be relied on by a consumer must be on forms approved by the office, and must provide for a maximum liability for incorrect information of not more than $1,000. On April 11, 2003, First American filed with OIR a petition for approval of title insurance policy forms, including schedules and endorsements thereto, previously approved by ALTA, for the issuance of the JLP in Florida, subject to a rate determination pursuant to Section 676.782, Florida Statutes. The petition asserted that First American had established historical data reflecting an "almost negligible default rate" for such policies, and that the growing market for "no-cost" or "low-cost" home equity loans and junior loans had led many institutional lenders to seek a product such as the JLP that could be provided quickly, accurately, and at a reasonable cost to the lender or borrower. First American did not suggest a specific premium rate for its proposed JLP.4 On or about April 14, 2003, ATIF filed with OIR a "petition for rulemaking setting title insurance rates." ATIF's petition sought approval of forms previously adopted by ALTA. Unlike the First American petition, the ATIF petition requested a specific premium rate, in the following terms: Based on the high-demand and low anticipated claims rates for this type of coverage, Petitioner estimates that a rate equal to 30% of the rate premiums presently promulgated for a mortgage title insurance policy pursuant to Rule 4-186.003, F.A.C.[5] with a minimum premium of $100.00 per policy, will provide a reasonable margin for underwriting profit and contingencies, including contingent liability as provided in [Section 627.7865, Florida Statutes],[6] such as to allow a rate of return on capital that will attract and retain adequate capital investments in the title insurance business and maintain an efficient title insurance delivery system. In support of such rate, Petitioner would show as follows: The Petitioner's low prospective loss experience under the proposed policy. The Petitioner's low expenses and low prospective expenses for administration and handling of risks. The proposed premium will be $1.725 per $1,000 of coverage up to and including $100,000, and $1.50 per $1,000 of coverage in excess of $100,000, up to and including $250,000 of maximum coverage, with a minimum premium of $100.00. This proposed rate will not be excessive, inadequate or unfairly discriminatory, and will apply throughout the State of Florida. This proposed rate will be subject to the Respondent's review not less frequently than once every three (3) years, and may be revised based on such review. By letter dated June 13, 2003, OIR informed ATIF that it agreed the rulemaking process should be initiated in this matter, and that OIR would hold workshops to gather information as to the propriety of the rate suggested by ATIF. OIR's letter notified ATIF that OIR neither approved nor disapproved of the forms submitted by ATIF at that time, pending receipt of sufficient data at the workshops to permit OIR to make an informed decision. By letter dated June 23, 2003, ATIF's senior underwriting counsel, Ted Conner, informed OIR that ATIF did not dispute OIR's decision to initiate the rulemaking process and postpone approval of ATIF's forms. Following receipt of the First American and ATIF petitions and the decision to initiate the rulemaking process, OIR commissioned The David Cox Company to prepare an actuarial report (the "Cox Report") on the rates and forms for the proposed JLP. OIR general counsel Steven Parton recalled that Mr. Cox was hired to provide "an independent look" at the two proposed rates. Mr. Cox requested information from ATIF and First American. ATIF responded with detailed answers to Mr. Cox' questions as well as to follow-up questions from OIR concerning the scope of services required to make the determination of insurability under the JLP and the events that might trigger a claim under such a policy.7 The Cox Report, dated September 2003, and provided to OIR on November 24, 2003, made the following relevant recommendations: the ALTA Residential Limited Coverage Junior Loan Policy form, the Short Form Limited Coverage Junior Loan Policy and endorsements JR1 and JR2, all dated 10/19/96, should be adopted; eligibility for the JLP should be restricted to institutional lenders, to land having 1-4 residential units, and to loan amounts less than or equal to $250,000; and that the JLP premium should be no lower than $2.00 per $1,000 of liability and no higher than $2.60 per $1,000 of liability. The premium for a standard title insurance policy is $5.75 per thousand of liability. Fla. Admin. Code R. 69O-186.003(1)(a). Mr. Cox justified his premium recommendation in summary as follows: My recommended Junior Loan Policy risk rate of $2.00 to $2.60 is a 55% to 65% discount off of the owner's policy risk rate. The discount is based on judgment considering the relatively low level of expense and loss for the Junior Loan Policy, other Florida risk rate discounts and rates used in other states. The proposed rates should not result in inadequate compensation to insurers operating through independent agents. The Cox Report was conceptually based on a comparison of the JLP to a standard title insurance policy. Mr. Cox ultimately made an actuarial judgment as to the proper discount based on the reduced coverage, the fact that eligibility would be restricted to low cost, low risk title transactions, and the reduced expenses associated with the JLP. Mr. Cox concluded his report as follows: The Junior Loan Policy is a new product in Florida and out-of-state experience is incomplete and in some respects is not comparable. By necessity judgment must be used to set the Junior Loan Policy risk rate. This section will examine the consequences of setting an initial risk rate that is either too high or too low. The title insurance industry tends to view lenders as customers and not land owners [as customers]. This is because lenders are constant business associates while owners come and go. State and Federal laws prohibit rebating to lenders and other middlemen. Rebating drives up the cost of title insurance for the land owner. Rates for the junior loan policy that are set too low would act as a rebate to the lenders who pay the Junior Loan Policy premium directly. Furthermore, title insurers do not intend to track the expenses of the junior loan policy versus the owner's policy and any subsidy of the junior loan policy rates by the owner's policy rates will never be detected and corrected. Florida case law has upheld the rebating of commissions by title insurance agents (the agent's 70% share of the risk premium).[8] The rebating of related title services is not permitted under [Florida Administrative Code Rule 4-186.003(13)(a)][9] in that related title services cannot be provided below actual cost. Assuming there is competition in the junior loan title insurance segment, there would be little error in having a somewhat high risk rate because rebating commissions would adjust the risk rate downward.[10] This assumption does not, however, apply to policies written directly buy [sic] an insurer, in which case there is no commission to rebate. There are currently no insurers operating primarily on a direct basis in Florida . . . The primary consumer for the Junior Loan Policy is the lender. The second mortgage lender is concerned with low closing costs and usually pays the title insurance premium directly. Lenders have much more bargaining power than borrowers as regards title insurance premiums. Price competition for the Junior Loan Policy is expected to be strong and lenders should be able to obtain rebates on commissions and discounts on related title services. A critical part of title insurance risk rate is that part retained by insurers operating through independent agents. This segment's only source of revenue is the 30% retained risk rate. Agents, attorneys, insurers operating through owned agencies, insurers writing directly and insurers providing related title services can supplement their revenues with related title service fees, which are essentially unregulated. Two prominent Florida title insurers, United General Title Insurance Company and Alliance Title of America, Inc. rely predominantly on the insurer's portion of the risk premium. These companies could sustain a net operating loss on Junior Loan Policy business if the risk rate is set too low. There is a range of reasonable risk rates for the Junior Loan Policy. A rate set on the high end of this range would avoid hurting insurers operating through independent agents while not necessarily hurting others. Setting a flat risk rate rather than a series of risk rates that decrease with the amount of liability further provides support for insurers operating through independent agents. Subsequent to the issuance of the Cox Report, First American commissioned Milliman USA to prepare an actuarial report (the "Milliman Report") regarding rates and forms for the JLP. The Milliman Report, written by actuary Paul Struzzieri, was dated February 2004. The Milliman Report concurred with the Cox Report as to the ALTA forms that should be adopted, and that eligibility for the JLP should be restricted to land having 1-4 residential units. As to rates, the Milliman Report recommended that the JLP premium should be no lower than $0.86 per $1000 of liability, and no higher than $1.33 per $1000 of liability, and recommended a cap of $500,000 on the junior mortgage loan. In his report, Mr. Struzzieri took a different conceptual approach from that taken by Mr. Cox, who compared the JLP to a standard title insurance policy to arrive at a judgment of how much the standard policy's rate should be discounted to arrive at a fair JLP rate. Mr. Struzzieri believed that a more valid JLP rate could be derived from viewing the rates charged for JLPs in other states, and by comparison to the rates charged in Florida for the Ownership and Encumbrance ("O&E") reports described in Section 627.7843, Florida Statutes, which is set forth in full at Finding of Fact 9, supra. Mr. Struzzieri explained his proposed rates as follows: The rationale for my proposed rates is two- fold. The Junior Loan Policy has less risk than the Original Title Insurance Policy. The reduced risk comes from reduced levels of coverage and the elimination of defalcation claims. . . . Because there is less coverage, there is significantly less work involved in preparing and issuing a Junior Loan Policy. The following sections describe the support for the Junior Loan Policy losses (associated with reduced risk) and expenses (associated with reduced work load). I believe that these reduced amounts are reflective of the costs underlying a Junior Loan Policy by comparison to (a) rates for Junior Loan Policies in other states and rates for the Ownership and Encumbrance (O&E) report, to which the Junior Loan Policy coverage is most compatible. Reduced Risk As shown in the Cox report, losses are approximately 4% to 7% of the rate in Florida. . . . The current rate for an Original Title Insurance Policy (Owner or Lender) is $5.75 per $1,000 of liability. At a 5% loss ratio, losses would equal approximately $0.30 per $1,000 of liability. In First American's August 15, 2003, response to Cox's request for information regarding the Junior Loan Policy, a loss rate of $0.03 per $1,000 of liability is assumed. I believe that this is a reasonable estimate of the loss potential for the Junior Loan Policy, based on my attached analysis. . . .[11] This represents a 90% decrease in the losses underlying the Original Title Insurance Policy rates. The proposed Junior Loan Policy rates are 74% to 85% lower than the $5.75 rate, lower percentages than that indicated by the loss experience (i.e., 90%).[12] I believe that this comparison is illustrative of the magnitude of the reduced coverage and, therefore, the reduced effort and expense involved in issuing a Junior Loan Policy. Reduced Work In Florida, "primary title services" are included in the rate and are defined to include: determination of insurability in accordance with sound underwriting practices based upon evaluation of a reasonable search and examination of the title, determination and clearance of underwriting objections and requirements to eliminate risk, preparation and issuance of a title insurance commitment setting forth the requirements to insure, and preparation and issuance of the policy. The amount of work involved in issuing a Junior Loan Policy is greatly reduced because of the reduced coverage. In addition, the risk is reduced because of certain services that are generally performed by the lender. As an example of reduced work, a Junior Loan Policy insures against losses related to the borrower not being the same as the grantee in the last recorded deed. In order to determine insurability for a Junior Loan Policy, one must review the search to verify that the borrower is the grantee in the last deed of record. In addition, one must determine that the land described in the policy is the same as the land described in the deed to the borrower. To clear underwriting objections and eliminate risk, one must review the search results from the public records to verify that there are no liens against that borrower and that real estate taxes are current. As an example of reduced risk, I point out that the home equity lender generally performs the closing and disbursement functions. Therefore, most of the costs associated with these functions are borne by the lender and not the Junior Loan Policy issuer. Since neither the agent nor underwriter is involved in disbursing the funds, the defalcation element of the premium is eliminated. Mr. Struzzieri believed that the O&E report is the product most comparable to the JLP and therefore the one most likely to yield a reasonable rate: While the above discussion illustrates the minimal level of work involved in issuing a Junior Loan Policy, it is difficult to quantify the cost of this work because solid expense data is not available. Therefore, it is appropriate to compare the Junior Loan Policy to an O&E report. Essentially, the level of work involved in issuing a Junior Loan Policy is the same as the work performed for an O&E report. The majority of home equity loan transactions in Florida are currently closed using an O&E report. The cost of an O&E report to the lender is typically between $60 and $100 (this includes the cost of a search, which for the Junior Loan Policy would be an additional charge). Anecdotally, the O&E report is purported to be profitable to the companies in this business. For the $75,000 home equity loan used by Cox in the exhibits to his report, the premium for the Junior Loan Policy at the lower proposed rate ($0.86 per $1,000 of liability) would be $64.50[,] just above the low end of the range of O&E costs. Although the Junior Loan Policy provides broader coverage than the O&E report in Florida, the loss portion of the rate is small (estimated at $0.03 earlier in this report). Therefore, we conclude that my proposed rate (lower bound) of $0.86 is appropriate in Florida. The higher bound proposed rate ($1.33) would produce a premium of $99.75 in this example[,] equal to the high end of the range of O&E costs. As mentioned earlier, the cost associated with a search would be added onto the $99.75 premium. Therefore, I believe that any rate higher than $1.33 would be excessive. Unlike the Cox Report, the Milliman Report did not expressly consider the impact of an insurer's business model in the rate determination. Mr. Cox noted that setting a rate at the high end of his reasonable range "would avoid hurting insurers operating through independent agents while not necessarily hurting others." Mr. Struzzieri made no assessment of the impact his proposed rate would have on title insurers that operate through independent agents. This impact is of great concern to ATIF because it operates exclusively through independent agents, and because Subsection 627.782(1), Florida Statutes, permits the agent to retain as much as 70% of the premium. On April 30, 2004, OIR published proposed JLP rules establishing a JLP premium rate of $1.33 per $1000 of liability. Florida Administrative Weekly, vol. 30, no. 18, pp. 1788-1790. OIR general counsel Steven Parton testified that this rate was based on the Milliman Report and on "what we thought was an understanding among insurers that $1.33 per $1,000 would be acceptable to everybody. That turned out not to be true." Mr. Parton recalled that ATIF did not find the $1.33 rate acceptable.13 On September 10, 2004, OIR published a "Notice of Withdrawal" of those proposed rules. Florida Administrative Weekly, vol. 30, no. 37, p. 3784. In a letter to Ted Conner of ATIF dated August 17, 2004, OIR deputy director Lisa K. Miller explained OIR's decision to withdraw the proposed JLP rule as follows, in pertinent part: Thank you for working with the Office during the investigation of the proposed junior loan title product and the development of proposed rule drafts. At this time the Office has determined not to adopt the requested junior loan title product. Applicable statutory provisions do not specifically grant legislative authority for a rule adopting the JLP product, as required by FL Board of Medicine v. FL Academy of Cosmetic Surgery, Inc., 808 So. 2d 243, 253 (Fla. 1st DCA 2002). Additionally, Section 627.784, Florida Statutes prohibits casualty title insurance such as the JLP product.[14] Adoption of this proposed rule would therefore be arbitrary, capricious, and not reasonably related to any statue that could possibly enable the Office to adopt the JLP through a rule, in contravention of Joseph v. Henderson, 834 So. 2d 373, 375 (Fla. 2d DCA 2003). . . . By Order dated May 20, 2005, OIR approved First American's use of the ALTA Residential Limited Coverage Junior Loan Policy form, with Florida modifications, and endorsement form JR1, both dated 10/19/96. On June 3, 2005, OIR published proposed Florida Administrative Code Rule 69O-186.003 with a proposed rate of $0.86 per $1000 of liability written. Florida Administrative Weekly, vol. 31, no. 22, pp. 2029-2030. This version of the proposed rule was held to be an invalid exercise of delegated legislative authority, but only on the procedural ground that OIR had published the rule without the approval of the Commission as the agency head. Attorneys' Title Insurance Fund, Inc. and Florida Land Title Association, Inc. v. Financial Services Commission and Office of Insurance Regulation, Case No. 05-2630RP (DOAH May 17, 2006). OIR filed its notice of appeal of the summary final order in Case No. 05-2630RP to the First District Court of Appeal, but voluntarily dismissed the appeal on March 23, 2007. On June 12, 2007, the Commission approved for publication proposed Florida Administrative Code Rule 69O-186.003, again proposing a rate of $0.86 per $1,000 of liability written. The full text of the Proposed Rule is as follows: 69O-186.003 Title Insurance Rates. The following are risk rate premiums to be charged by title insurers in this state for the respective types of title insurance contracts. To compute any insurance premium on a fractional thousand of insurance (except as to minimum premiums), multiply such fractional thousand by the rate per thousand applicable, considering any fraction of $100.00 as a full $100.00. (1)(a) and (b) No change. For junior loan title insurance: The premium for junior loan title insurance shall be: $0.86 per $1,000.00 of liability written; The minimum premium shall be $50.00; The minimum insurer retention shall be 30%. This rate is approved for use with the following junior loan title insurance policy forms, copies of which are available on the Office's website www.floir.com: ALTA Residential Limited Coverage Junior Loan Policy (10/19/96)(with Florida Modifications) and ALTA Endorsement JR 1 (10/19/96); ALTA Short Form Residential Limited Coverage Junior Loan Policy (10/19/96)(with Florida Modifications), and ALTA Endorsement JR 1 (10/19/96); and Any substantially similar product that insures the same type risk. This rate does not include the $25.00 premium that shall be charged when issuing the optional ALTA Endorsement JR 2 (Revolving Credit/Variable Rate)(10/19/96) on a junior loan title insurance policy, as provided for in Florida Administrative Code Rule 69O-186.005(6)(c).[15] Eligibility for the junior loan policy shall be restricted to the following: The insured title is for land having 1-4 residential units; The junior loan must be a second or subsequent mortgage loan and must meet the definitional requirements of a "federally related mortgage loan", as defined in the Real Estate Settlement Procedures Act of 1974, 12 U.S.C. s. 2602, which is incorporated by reference and a copy is available from the Office; The junior mortgage loan amount is less than or equal to $500,000; No junior loan policy may be issued for an amount less than the full junior loan principal debt. (2) through (12) No change. On June 22, 2007, OIR published the notice of the Proposed Rule. As specific authority for the Proposed Rule, the notice cited Sections 624.308, 626.9611, 627.777, 627.782, and 627.793, Florida Statutes. The notice stated that the Proposed Rule would implement the following: Subsections 624.307(1), 626.9541(1)(h)3.a., Sections 627.777, 627.782, 627.783, 627.7831, 627.7841, 627.7845, and Subsection 697.04(1), Florida Statutes. OIR held a rule development workshop on July 24, 2007. On November 14, 2007, the Commission approved the Proposed Rule for final adoption. Petitioners' claim The Petition notes that Subsection 627.782(1), Florida Statutes, provides that at least 30% of the proposed JLP premium must be retained by the title insurer. ATIF asserts (without contradiction at the hearing) that the Legislature established this 30% minimum retention to ensure that market pressures, such as competition to attract and keep agents, do not lead title insurers to retain less premium than necessary to maintain their economic viability. Florida title insurers generally retain only the minimum 30% of the premium due to competition for agents. At the hearing, Petitioners presented a breakdown of the division of premium that would occur with the sale of a $100,000 policy if the JLP premium were set at $0.86 per $1,000. Out of a total premium of $86.00, the title insurer would receive $25.80. From this premium, the insurer must cover its expenses for issuing the JLP, generate a profit sufficient to attract and retain adequate capital investment, and set aside reserves to pay for claims. Petitioners noted that Subsection 625.111(1)(b), Florida Statutes, requires title insurers to maintain a guaranty fund of $0.30 per $1,000 of net retained liability for policies written or title liability assumed in reinsurance. On a $100,000 policy, the title insurer would be required to place $30.00 into the guaranty fund. Petitioners also noted that Section 624.509, Florida Statutes, requires title insurers to pay a premium tax of 1.75% of their gross receipts on each policy. The insurer is liable for the tax on the full premium, even though the insurer actually retains only 30% of that amount. On a $100,000 policy with a premium of $86.00, the premium tax paid by the insurer would therefore be $1.51. Petitioners concluded that when the statutory liabilities ($30.00 guaranty fund and $1.51 premium tax) are deducted from the title insurer's 30% share of the $86.00 premium, the title insurer would actually lose $5.71 on a $100,000 policy. This deficit would have to be covered by funds from the insurer's general operating budget. Mr. Conner, now ATIF's vice president and associate general counsel, testified that the $5.71 per policy loss does not address other underwriting costs, such as policy processing, the cost of operating the claims department, the general overhead of running a large business, or the return on capital required under Subsection 627.782(2)(b), Florida Statutes. Petitioners also offered evidence that the overall cost of performing the services associated with a JLP policy would greatly exceed the premium generated by the $0.86 per $1,000 rate. Mr. Conner spoke at the July 2007, workshop and tried to explain that the proposed JLP rate would not cover the expense of providing primary title services. OIR general counsel Steve Parton responded that OIR had no hard data on the cost of those functions and thus had no way of incorporating ATIF's concerns into the proposed rate. In an attempt to quantify the cost of providing primary title services for a JLP policy, Mr. Conner directed his central Florida branch staff to randomly16 select five residential properties on which a hypothetical second mortgage would be sought and to conduct a search and examination of title consistent with issuing a JLP. This analysis yielded the conclusion that primary title services, including labor costs, for a JLP policy cost a little over $100 per policy. If overhead is included, the total costs are approximately $150 per policy. Mr. Conner testified that the cost of performing these primary title services would be constant regardless of the size of the policy, and that they would have to be paid from the agent's maximum 70% share of the premium.17 On a $100,000 policy, the agent's share of the premium based on a rate of $0.86 per $1,000 would be $60.20. Mr. Conner further testified that a rate sufficient to cover the cost of the primary title services and provide a reasonable profit would be very close to the $2.00 to $2.60 range recommended by the Cox Report. Mr. Conner concluded that the agent's share would be "wholly inadequate" to compensate him for the work he must do. Mr. Conner testified that a number of ATIF's member agents represent lenders such as credit unions and community banks, and these agents will be issuing policies on second mortgages issued by those institutions. ATIF is concerned that the inadequate rate proposed by OIR could lead agents to issue the JLP without performing all the necessary title services, which would naturally increase ATIF's claims experience.18 Mr. Conner concluded that any title company offering the JLP at $0.86 per $1000 of liability, even by selling the product directly, would be offering it as a loss leader to obtain customers for other products. Petitioners contend that OIR's proposed adoption of the $0.86 per $1000 premium rate for the JLP fails to give "due consideration" to the specific ratemaking criteria set forth in Subsection 627.782(2), Florida Statutes. Petitioners contend that the proposed premium is plainly inadequate and insufficient for the JLP to exist as a self-sustaining product, and will thus require the title insurer to supplement issuance of the JLP with premium dollars collected on its other title insurance policies. Petitioners note that such a drain on premiums for these other policies was not contemplated when those policies' rates were adopted. Petitioners contend that the evidence establishes that OIR and the Commission have failed to consider the impact of the proposed premium rate on title insurance agents, including the adequacy of the rate in paying for the cost of primary title services connected with the JLP, and the agents' ability to earn a rate of return on their capital that will attract and retain adequate capital investment in the title insurance business and maintain an efficient title insurance delivery system, as required by Subsection 627.782(2)(b), Florida Statutes. Finally, Petitioners contend that the proposed JLP rule is vague and ambiguous because it provides that the JLP premium is approved for use with the named ALTA policies or with "[a]ny substantially similar product that insures the same type risk," but does not define the term "substantially similar product." OIR's response OIR's position is that it fulfilled its statutory ratemaking obligations under Subsection 627.082(2)(b), Florida Statutes, and made a rational decision to rely on the Milliman Report and the opinion of Mr. Struzzieri. Mr. Parton conceded the apparent anomaly of rejecting the OIR-commissioned, independent actuarial report of Mr. Cox in favor of a report commissioned by and based entirely on information provided to the actuary by a single company, First American. Mr. Parton also offered considered reasons for the agency's rejection of its own actuarial report. Mr. Parton testified that OIR had a number of concerns with the Cox Report. In the first place, Mr. Cox' fundamental premise regarding Florida law was inaccurate: OIR is not required to "create a rate that would fit everybody's business model." The rate promulgated by OIR need not be sufficient to guarantee profits to companies operating through agents. OIR believed that the Cox Report placed undue emphasis on setting a rate amenable to companies that worked only through agents and disregarded companies that perform direct sales even though the JLP, because it is a simple transaction, is tailored toward a direct business approach. Mr. Parton believed that Mr. Cox should have focused on a company such as First American, which was actually selling the JLP in other states and presumably could provide actual market data for use in recommending a rate. OIR also took issue with Mr. Cox' preference for setting the rate on the high side of the recommended range. The Cox Report noted that agents are free to rebate part of the rate to their customers. Relying on a rebate scheme to bring down rates hides the real cost of title insurance from both the consumer and regulator, and introduces unfair discrimination because not everyone will be able to take advantage of the rebate. OIR concluded that the existence of a rebate scheme constitutes an admission that the rate is excessive. OIR also suggested that ATIF's concern about not being able to cover expenses from the insurer's 30% share of premium could be solved by the insurer taking a greater share of the premium. OIR believed that the conceptual approach of the Milliman Report was more sound, because the agency was persuaded that the JLP bears much more resemblance to an O&E report than to a primary title insurance policy. Mr. Parton testified that during discussions with industry representatives, he had raised the question whether the JLP was really a title insurance product at all. Mr. Parton felt that the JLP was really "an [O&E] report that is trying to be dignified to the level of actually being an insurance policy, whereas an [O&E] report as it is set out in statute is not for the purposes of insurance and has a limit I believe of $1,000 for which you can make any claim against that report. Yet here we were with essentially a product that did nothing more than create an [O&E] report." OIR believed that the Milliman Report made more sense than the Cox Report because the former treated the product as OIR saw it: an O&E report with an insurance product attached. Mr. Parton pointed out that both reports relied on a great deal of actuarial judgment because the JLP is a new product to Florida. Mr. Cox arrived at his recommended rate by discounting a standard title insurance policy, whereas Mr. Struzzieri chose to rely on the costs and loss experience of a company that is actually writing this type of policy in other states. OIR concluded that the Milliman Report more consistently reflected the risk associated with the policy and the policy's intent to deal with simple transactions. Mr. Parton testified that OIR considered the statutory "reasonable margin for underwriting profit and contingencies" ratemaking factor through its reliance on the Milliman Report's analysis of O&E reports. By assuming that the costs embedded in an O&E report are covered by the price First American charges for that product, and then assuming that the cost of producing a JLP would be similar to the costs of producing an O&E report, Mr. Struzzieri was able to arrive at the concluding assumption that $0.86 per $1,000 of coverage would provide a reasonable level of profit for the JLP. OIR accepted the Milliman Report's conclusions without further inquiry into the data upon which Mr. Stuzzieri relied. Mr. Parton testified that OIR did consider all the business models in the industry, but finally chose to go with the lowest rate proposed: [T]he OIR and the Governor and Cabinet in looking at the business models, [ATIF] is a strictly agent-driven entity; that is to say, all sales are through agents. First American as well as [Fidelity National Title Insurance Company], who also sells this product and is not contesting this rate, use a combination of sales through independent agents, affiliated agencies, which are owned, if you will, by the company in direct writing. [The JLP] is a product that frankly lends itself greatly to direct writing, particularly since what you're talking about is essentially simple transactions as opposed to major transfers of title of property. So at the end of the day, in looking at what is going on, we're looking at a company, actually two companies, who are actually selling this product nationwide, have a business model which allows them to write direct, which we believe and I think it's reported reduces costs, and a company who does it strictly through agents and who is not selling this product and has never sold this product . . . [OIR] and [the Commission] in our recommendation and explanation has [sic] come to the conclusion that we have an ability here to actually set a rate that significantly lowers cost in at least limited circumstances. We have a company who is actually engaged in the business of selling this, and we have a company who has proposed a rate and had said, "I can write this rate and make a profit at 86 cents." So ultimately the decision was to go with that particular matter. Thus, OIR's position on giving "due consideration" to the ratemaking factor of "reasonable margin for underwriting profit and contingencies" found at Subsection 627.782(2)(b), Florida Statutes, as explicated by Mr. Parton, is that the statute allows OIR to set the rate at the lowest level at which any one company's actuary concludes it can make a profit.19 If the rate is set any higher, then the company that could have made a profit at the lower rate will be charging an excessive rate, to the detriment of policyholders. Mr. Parton testified that OIR was "not setting the rate for the industry as a whole. . . . I'm setting the rate we believe . . . meets all the requirements of the law, which may not be for the industry as a whole, but in fact can be adjusted if needed." OIR set great store in the fact that the $0.86 per $1,000 rate was proposed by "someone who actually engages in that business, who has engaged an actuary to take a look at the rate based upon the factors of the company who is actually doing it, and they use a direct business model." ATIF is not marketing this product anywhere in the country, and may never market it with its totally agent- generated business model. Mr. Parton stated that "due consideration was given by the fact that the insurers that are actually doing business in this matter have a business model which puts less emphasis on agent generated business and more on direct writing . . .". Mr. Parton noted that one factor leading to the adoption of the proposed rate was the availability of the "rate deviation" process set forth in Section 627.783, Florida Statutes. See Finding of Fact 8, supra, for the statute's text. Mr. Parton testified that Mr. Cox erred in not taking note of the rate deviation statute in his recommendation: ... Florida law allows any insurer to petition for deviation from a promulgated rate, and that's one of the things that, frankly, I believe Mr. Cox did not consider in setting this rate. If, in fact, the rates were set too low for [an] insurer operating through independent agents, and that insurer felt that it hurt him to be able to charge that, that insurer has the ability to petition for deviation and to have a rate set higher than that based upon what they have petitioned. . . . All they have to do is petition the Office pursuant to the statute, prepare whatever documentation under oath they feel supports what they need, and the Department [sic] will make a determination whether or not that justifies a higher rate.[20] * * * . . . It is not necessary for us to take into account the whole industry in adopting a rate when, in fact, the law particularly contemplates that that rate is not necessarily going to be the same for everybody and allows for companies who have a different business practice and different approach to present that to the Office for approval to charge a different rate. And if that's what [ATIF] wants to do, that's fine. So, it's difficult for me to understand how they're adversely impacted by that. Mr. Parton asserted that the rate deviation statute was especially significant to OIR's analysis because Chapter 99-286, sec. 13, Laws of Florida, changed the provision from an industry-wide deviation to one applying to a single applicant, meaning that for the first time the Legislature had authorized more than one rate for each type of title insurance.21 Mr. Parton testified that OIR considered the statutory "loss experience and prospective loss experience" ratemaking factor by holding a rate hearing to which the entire industry was invited, as well as by considering the Cox and Milliman Reports, both of which took loss experience into consideration. Mr. Parton testified that OIR's consideration of the statutory "past expenses and prospective expenses" ratemaking factor was essentially confined to its reliance on the Milliman Report's actuarial judgment in basing the potential costs expenses for the JLP on the costs and expenses associated with an O&E report. Mr. Parton testified that OIR's consideration of the statutory "defalcation" ratemaking factor consisted of adopting the Milliman Report's finding that there is virtually no danger of defalcation with the JLP product because the refinancing would almost always be handled by a bank, eliminating the danger of money passing through the hands of an agent. In summary, OIR's defense of proposed Florida Administrative Code Rule 69O-186.003(1)(c) is premised on its acceptance of the Milliman Report. This acceptance in turn reflects acceptance of the core concept of that report: that the JLP more resembles an O&E report than it does a traditional primary title mortgage policy. Expert testimony on the Milliman Report Dr. Nelson R. Lipshutz testified on behalf of Petitioners as an expert in the economics of the title insurance industry. Dr. Lipshutz has decades of experience in the design and implementation of title insurance statistical plans and ratemaking, including having designed ALTA's Uniform Financial Reporting Plan and Uniform Statistical Plan, which are used as the basis for title insurance regulation in roughly half of the United States. He collects data on behalf of rating bureaus in three states, has served as a consultant for several state departments of insurance (including Florida's) and is the author of a textbook, The Regulatory Economics of Title Insurance. Dr. Lipshutz was retained by ATIF to analyze the Milliman Report. At the hearing, Dr. Lipshutz explained that, unlike other lines of insurance, title insurance is not a loss reimbursement activity; rather, it is a loss prevention activity. Title insurance does not insure against some future contingency, but looks to the past to insure the state of title at a particular point in time. Relative to other lines of insurance, losses consume a small portion of the premium. With title insurance, more of the premium goes toward searching the title in a very complete way. Dr. Lipshutz stated that in most casualty lines, the amount of premiums going out in losses is between 60% and 110%, whereas the losses for title insurance are between 3% and 10%. Because such a small percentage of the title insurance premium goes to the underwriter, the losses are still significant, but loss prevention costs drive the rate for title insurance. In examining the Milliman Report, Dr. Lipshutz first critiqued Mr. Struzzieri's loss calculation, which was based on five years (1999 through 2003) of First American's experience writing JLPs. Mr. Struzzieri had data from First American as to its total liability written in each of those years, and the actual losses incurred on those policies up to June 2003. He also had national loss data averages developed by Milliman to predict the percentage of overall expected losses that were represented by those actual losses as of June 2003. These numbers allowed Mr. Struzzieri to calculate projected ultimate losses for each year, including a projected ultimate loss per $1,000 of liability. Mr. Struzzieri's ultimate projection was an expected loss of $0.03 per $1,000 of liability for the JLP. This projection included two years, 2001 and 2003, for which Mr. Struzzieri had no loss data and thus projected zero losses on over $6 million in liability written. At the outset, Dr. Lipshutz noted that title insurance has a long tail line, meaning that losses take a long time to come in. Unlike auto insurance, where the losses are fairly well known during the policy year, the tail on title insurance can go out for 20 years. The losses in title insurance must be projected and Mr. Struzzieri was conceptually correct in attempting a loss projection. Dr. Lipshutz faulted Mr. Struzzieri's projection for including the "highly unlikely" scenario of policy years with zero losses. Dr. Lipshutz also noted that the estimated losses for 1999, the earliest year in the report and therefore the year with the most fully developed losses, were $0.14 per $1,000, almost five times Mr. Struzzieri's overall projected loss for the JLP. Dr. Lipshutz was also critical of Mr. Struzzieri's use of national data because title insurance is "highly geographically idiosyncratic." Factors that can lead to losses in Florida, such as navigational servitudes, are insignificant in a state such as Arizona. Dr. Lipshutz found no discussion in the Milliman Report of the Florida market, as opposed to general comments on the title insurance industry. Dr. Lipshutz also noted that mortgage fraud is "endemic" in Florida. The state ranks first in the nation in mortgage fraud, with a rate twice the national average in 2006. Because a JLP is essentially insuring the identity of the property owner, fraud and identity theft in Florida should not be ignored in any loss calculation. Finally, Dr. Lipshutz faulted Mr. Struzzieri's loss calculation for failing to account for the cyclical nature of title insurance. When the real estate market is doing well, the losses on title insurance are low. When the market goes down, there are large spikes in the loss ratios. Dr. Lipshutz stated that the five years included in Mr. Struzzieri's analysis were some of the best years ever in the real estate industry. Using a mere five-year experience base will not lead to a good result unless the analysis accounts for the fact that the years under review are very strong for the market, and factors in the inevitable down cycles of the market. Dr. Lipshutz believed that Mr. Struzzieri's analysis gave insufficient consideration of what will happen in a downturn. Dr. Lipshutz next critiqued the Milliman Report's expense calculation or, rather, its lack of an expense calculation. After describing the "minimal level of work" involved in the issuance of a JLP, Mr. Struzzieri noted that it would be difficult to quantify the cost of the work because "solid expense data is not available." Therefore, Mr. Struzzieri looked to expense data for O&E reports as his point of comparison for deriving a JLP expense estimate. The problem with this approach, according to Dr. Lipshutz, was that Mr. Struzzieri also lacked "solid expense data" for O&E reports. Mr. Struzzieri's analysis is "extremely simple" and based on a series of assumptions that lack empirical support. First, Mr. Struzzieri assumes that "the level of work involved in issuing a Junior Loan Policy is the same as the work performed for an O&E report." Nothing in the Milliman Report attempts to quantify the expenses involved in issuing a JLP beyond the assertion that the work is the same as that involved in issuing an O&E report. Having made that assumption, Mr. Struzzieri then asserts that the cost of an O&E report to a lender is usually between $60 and $100. The Milliman Report provides no data to support that assertion. At the hearing, Mr. Struzzieri conceded that he had no supporting data for the $60 to $100 cost range and testified that an unnamed employee of First American gave him those numbers during a telephone conversation. Dr. Lipshutz testified that his own casual Google search of O&E prices in Florida turned up figures ranging from $125 to $250. While acknowledging that his search did not produce a scientific sample, Dr. Lipshutz rightly contended that it nonetheless called into question the validity of the upper end of Mr. Struzzieri's cost range. Finally, Mr. Struzzieri makes an assumption, based on anecdote, that O&R reports are profitable to the companies in that business. The Milliman Report does not include the anecdotes on which this assumption is based. Dr. Lipshutz thus described the Milliman Report's analysis as a conclusion reached at the end of a string of unsupported assumptions: if one assumes that the level of work for a JLP equals that for an O&E report, and assumes that the cost of an O&E report is between $60 and $100, and assumes that the companies make a profit by charging between $60 and $100, then one may assume that a JLP rate that provides the same revenue (calculated by Mr. Struzzieri to be between $0.86 and $1.33 per $1,000 on a $75,000 loan) would be profitable. Because the Milliman Report contained no data to allow one to test the reasonableness of its assumptions, Dr. Lipshutz concluded that the report's findings were unsupported and unreliable. Dr. Lipshutz disputed that a JLP is directly comparable to an O&E report, or at least the notion that such a comparison may be assumed without proof. He pointed out that an O&E differs from a JLP "even on the simplest financial terms." Because an O&E report is not an insurance product, no premium tax is charged on it. Dr. Lipshutz was not certain whether the issuer of an O&E report is required to maintain a guaranty fund, but noted that any such contribution would be negligible because the liability on an O&E report is limited to $1,000. The analysis discussed at Findings of Fact 35 and 36, supra, was performed at Dr. Lipshutz' request. As noted above, ATIF calculated that performing primary title services, including labor costs, for a JLP policy would cost slightly more than $100 per policy, and about $150 if overhead costs are included. ATIF performed the same calculation for an O&E report and found that the production cost would be just under $50 per policy, and just over $100 if overhead is included.22 Included in Dr. Lipshutz' written report were two charts produced by ATIF to support its calculation of the difference in cost between a JLP and an O&E report. The first chart showed the differences in coverage between the two products: Coverage JLP O&E Limit of liability $500,000 $1,000 Ad valorem taxes Yes No Gap coverage Yes No Encumbrances created by or liens against current owner Yes Yes Encumbrances created by or liens against prior owners Yes No Closing protection letter (CPL) coverage for failure of agent to follow lenders' closing instructions Available at no additional charge Not available CPL coverage for fraud or dishonesty of agent in handling lenders' funds or documents Available at no additional charge Not available Revolving credit/variable rate endorsement Available for $25 Not available Retain evidence of determination of insurability and premium charged for seven years Yes No The second chart showed the tasks required to produce a JLP and an O&E report:23 TASK JLP O&E Collect documents from recorder's office relevant to the property AFTER date of last deed or mortgage Yes Yes Collect documents from recorder's office relevant to the property BEFORE date of last deed or mortgage Yes No Check validity of documents Yes No Collect documents from courts for names in ownership AFTER date of last deed or mortgage Yes Yes Collect documents from courts for names in ownership BEFORE date of last deed or mortgage Yes No Check probate and foreclosure cases Yes No Check identity in case of common name Yes No Check for tax liens recorded AFTER date of last deed or mortgage Yes Yes Check for tax liens recorded BEFORE date of last deed or mortgage Yes No Check city and county tax offices for taxes owed Yes No Prepare O&E report No Yes Prepare commitment Yes No Downdate search before closing Yes No Review closing documents for compliance with conditions in commitment Yes No Review closing documents for compliance with lender's closing instructions Yes No Prepare policy Yes No Downdate search after recording and issue JR-1 and/or JR-2 endorsement Yes No From this data provided by ATIF, Dr. Lipshutz concluded that the extra work makes the cost of producing a JLP 85% higher than the cost of producing an O&E report, and corresponds to a rate of $2.52 per $1,000 of insured liability. Even accepting Mr. Struzzieri's range of reasonable rates ($0.86 to $1.33 per $1,000 of liability written), applying this 85% cost factor would change the range to $1.59 to $2.46 per $1,000 of liability. Dr. Lipshutz noted that this range overlaps significantly with the range of $2.00 to $2.60 per $1,000 recommended in the Cox Report. Dr. Lipshutz termed "specious" the statement in the Milliman Report that "[t]he proposed Junior Loan Policy rates are 74% to 85% lower than the $5.75 rate, lower percentages than that indicated by the loss experience (i.e., 90%)." Dr. Lipshutz stated that this statement would be reasonable in the context of auto insurance, where the primary concern is loss reimbursement: if the loss is 90% lower, then the rate should be 90% lower. However, in this case it is "downright silly" to tie rates to losses because loss prevention, not loss reimbursement, drives expenses in title insurance. As noted above, OIR contended that if an underwriter took a larger split of the premium from its agents, or wrote the policies directly, then the $0.86 per $1,000 rate for the JLP would be adequate. Dr. Lipshutz called this contention "violently incorrect." He stated that it is a "specious distinction" to say that a rate could be adequate for a direct writer but inadequate for an underwriter working through agents. Certain core title services must be performed, certain reserves must be set aside, and certain losses will have to be paid regardless of the premium split between the agent and underwriter. If the premium is not large enough to cover all of those costs, the rate will be inadequate regardless of the insurer's business model. As a secondary matter, Dr. Lipshutz noted that it is difficult for underwriters to dictate changes in the premium split to their agents. The market is competitive, and agents will walk away from an insurer that attempts to take more than the statutory 30% split of the premium. Many agents write for multiple insurers, and would likely direct most of their business toward those who were most generous in their premium splits. Dr. Lipshutz did not believe that changing the split is a practical way to solve the rate adequacy problem even from the underwriter's standpoint. Dr. Lipshutz was also critical of OIR's suggestion that dissatisfied insurers could avail themselves of the rate deviation statute, because it is difficult if not impossible to charge a significantly higher price than that charged by other participants in a competitive market. Dr. Lipshutz testified that rates are supposed to be based on industry averages, and thus disputed OIR's theory that a rate is "excessive" for any company that could offer the product for less than the promulgated rate. In a system of regulated competition as described by Dr. Lipshutz, it is a certainty that some companies are going to make more money than others at the promulgated rate. Those companies that cannot make a profit at the promulgated rate will drift out of that line of business. Those companies with high profits will invest more in their business, improving their technology and workflow. The profits and increased efficiency of these companies will appear in the industry data presented to the regulator, which will then fulfill its statutory mandate and lower the rate. However, if the initial rate is set so low that only one firm can sell the product at a profit, all of the other insurers are immediately knocked out of the market. Competition in the title insurance market is based on service as well as price, but the service element of competition would be wiped out by the low rate. Dr. Lipshutz was skeptical of the idea that a title insurer could offset an inadequate JLP premium with other charges because this product will be sold mostly to banks and other large institutional carriers, which have the leverage to resist paying extra charges above the statutory premium rate. Mr. Struzzieri testified at the hearing, after Dr. Lipshutz, to explain his methodology and defend the Milliman Report. He explained that he was contacted by First American to provide a rate analysis for filing with OIR. He reviewed the Cox Report and documents filed by First American in response to the report. Because there was no Florida experience on which to base his calculation, Mr. Struzzieri looked for other benchmarks and decided that the most relevant other experience would be JLP experience in other states. He examined the JLP loss experience of First American in other states and estimated an expected loss of $0.03 per $1,000 of liability written. This contrasted with an expected loss in the range of $0.20 to $0.30 per $1,000 on an original owner's or lender's policy. Mr. Struzzieri noted that, all things being equal, lower losses should result in a lower rate for the product. He agreed with Dr. Lipshutz that in title insurance, underwriting expenses are a more significant factor than expected losses in setting rates. Based on his understanding of the JLP product and what it covers, Mr. Struzzieri concluded that there is less work involved in the JLP than in a primary title policy and therefore less expense. Mr. Struzzieri's understanding was that the JLP "is intended for simple transactions such as, you know, a home equity loan, and that the lender on home equity loans is going to be performing the closing services as opposed to the title agent or the title company, the title insurers." This direct performance of closing services by the lender would eliminate the risk of defalcation by the title insurer or its agents, thus further driving down the cost of the JLP. Mr. Struzzieri stated that First American had no specific expense data for the JLP that would permit him to measure the work involved in producing a policy. Therefore, he needed to find other relevant data that would allow him to estimate the average cost of the work. Mr. Struzzieri's discussions with First American led him to study the O&E report, which seemed "parallel" to the JLP, such that the amount of work involved in the JLP could be assumed equivalent to the amount of work needed to produce an O&E report.24 Mr. Struzzieri decided to use O&E report costs as a proxy for the expense portion of the JLP product. First American told him that O&E report costs were between $60 and $100. Mr. Struzzieri conceded that he had no data to support those O&E costs, and did not doubt that Dr. Lipshutz found companies offering Florida O&E reports at prices well in excess of $100. Mr. Struzzieri also conceded that First American had initially convinced him of the comparability of the JLP and the O&E report by stating that the lender "probably will not close" if any adverse matters are uncovered during the limited search envisioned by the JLP. However, further discussions with First American had clarified that another option would be to exclude the adverse matters from coverage under the JLP and allow the lender to decide whether to close. Mr. Struzzieri pointed out that he checked his recommended rate range of $0.86 to $1.33 per $1,000 against the JLP rates charged by First American in other states. He believed that a comparison to other states' JLPs was more valid than a comparison to an original issue or owner's or lender's policy because of the greatly reduced scope, coverage, and the amount of work involved in a JLP. The data provided by First American showed rates that ranged widely, from $0.73 per $1,000 in California to $3.40 per $1,000 in New Mexico. Out of 29 states listed, only two had rates lower than $0.86 per $1,000. Seventeen of the 29 fell within a range of $1.33 to $2.33. Nonetheless, Mr. Struzzieri pronounced himself satisfied that his recommended range fit reasonably within the range of rates charged in other states. Mr. Struzzieri testified that he accepted Dr. Lipshutz' estimate of the risk of fraud and had no reason to doubt Dr. Lipshutz' data on the subject. However, Mr. Struzzieri did not believe that fraud had any bearing on his calculation of a $0.03 per $1,000 loss on the JLP because fraud losses are a small percentage of total title insurance losses. He acknowledged that there may be a small fraud component that his calculation missed by using national data rather than Florida data, given Florida's higher rate of fraud, but concluded that this component would be at most incremental. Mr. Struzzieri agreed that his data on the cost and profitability of an O&E report was anecdotal and unverified, but disagreed with Dr. Lipshutz' assertion that his anecdotal information about O&E profitability was the source of his conclusion that the JLP will be profitable at the recommended range of rates. Rather, said Mr. Struzzieri, the source of his assertion of profitability was the fact that First American is writing JLP policies in 29 other states, including California at $0.73 per $1,000, and appears to be making a profit on that business. He conceded, however, that this, too, was an assumption on his part. On cross-examination, Mr. Struzzieri was asked about a document he filed at OIR in response to a 2005 title insurance data call issued by OIR. In a letter dated November 17, 2005, Mr. Struzzieri wrote "to point out what I believe are several critical deficiencies in the 2005 title insurance data call." Mr. Struzzieri wrote that the deficiencies fell into two categories: missing information and insufficient data. As to the latter deficiency, Mr. Struzzieri wrote that OIR was not asking for enough information: It is my strong belief based on my many years of working with title insurance data that 5 policy years is insufficient to make rates. Reasons supporting this belief include: Long loss development "tail" -- Title insurance policies have no expiration date; claims continue to be reported far beyond 5 years after the policy effective date. . . . Not many losses reported in first 5 years -- Milliman analysis of title industry composite loss development triangles indicates that only a small percentage of total losses from policy years 2000 through 2004 are expected to have been reported as of December 31, 2004. For example, for policy year 2004, we would expect only 13% of "ultimate" losses to be reported by December 31, 2004. It is, therefore, my belief that policy years 2000 through 2004 are all too immature to be used in ratemaking without the benefit of additional policy years of data and will result in highly variable results. Title insurance cycle Milliman analysis of title insurance profitability indicates that title insurance is cyclical in nature. Specifically, profits vary with the real estate cycle; in particular, mortgage interest rates [sic]. For example, when interest rates are falling, title insurance revenue is higher and loss ratios are generally lower. Expenses are also higher; but not as high as revenue because certain expenses are relatively fixed. Therefore, profits are generally higher. When interest rates rise, revenues fall, expenses fall (but not as fast as revenue) and loss ratios increase. As a result, profits are lower. For this reason, I believe that any title insurance rate making exercise should use as many as 20 years of data (or at least 10 years). The number of years should correspond to a full real estate cycle. The 5 policy years included in the data call correspond to the lowest interest rates in the last 40 years. Therefore, the profits are likely much higher than an average year. When the real estate cycle turns (and there [are] indications that it soon may), the title industry may face losses. By using only the last 5 years, the OIR will be applying rates based off of the most profitable years and applying them to perhaps some very unprofitable years. However, if instead rates were based on 10, 15 or better yet 20 years of data, the OIR will have captured a complete cycle and will have made rates that are appropriate in the long run and, on average, for each individual year of the cycle. Mr. Struzzieri acknowledged his prior opinion that five years of data provides an insufficient basis for ratemaking, especially when those years were so recent that ultimate losses are uncertain. He further acknowledged that his own recommendation for a range of JLP rates was in part based on projected loss data from five years of recent First American policies. Mr. Struzzieri explained this apparent contradiction by noting that, as to primary title insurance, companies have sold the products in Florida for 50 to 60 years and typically report 20 years of data. As to the JLP, First American only had the five years of data used by Mr. Struzzieri. He agreed that more data would be better, but he used what was available. Summary Findings When it decided to commence rulemaking to set a premium rate for the JLP, OIR commissioned The David Cox Company to prepare an actuarial report on the rates and forms for the proposed JLP. The Cox Report recommended a rate ranging from $2.00 to $2.60 per $1,000 of liability, based on Mr. Cox' comparison of the JLP to a standard title insurance policy. Mr. Cox advocated setting the rate on the high end of the recommended range to avoid hurting insurers that operate through independent agents. OIR reviewed the Cox Report and found it flawed. OIR believed the Cox Report's recommended rate range was too high, because Mr. Cox overemphasized protecting companies that operate through agents, when the JLP appears more amenable to direct sales. OIR disapproved of Mr. Cox' rebate strategy for holding down rates, his assumption that the insurer is always bound to accept the 30% minimum premium split with its agents, and his failure to focus on actual market data generated by companies that are selling the JLP in other states. All of OIR's criticisms of the Cox Report's methodology and conclusions were reasonable concerns voiced by the regulatory entity charged with the responsibility to set a premium rate for the JLP. OIR had misgivings about whether the JLP qualified as an insurance product at all, and therefore found the Cox Report's conceptual strategy of "backing out" a JLP rate from the standard title insurance rate less than persuasive. The preponderance of the evidence at the hearing established that OIR's decision to reject the recommendations of the Cox Report was reasonable. OIR has freely conceded that the Proposed Rule is entirely dependent on the Milliman Report, with its recommended range of rates between $0.86 and $1.33 based on First American's experience in other states and the close comparison of the JLP to a non-insurance product, the O&E report. OIR's position, as elucidated by Mr. Parton, is that Section 627.782, Florida Statutes, allows OIR to base its ratemaking decision exclusively on an actuarial analysis conducted on behalf of one company, based on data derived exclusively from that company. OIR is under no obligation to set a rate for the industry as a whole, because any insurer that does not believe it can make a profit at the promulgated rate may petition for an upward deviation pursuant to Section 627.783, Florida Statutes. The rate should be set at the lowest level recommended by any single company's actuary, to ensure that no company can charge an excessive rate. ATIF demonstrated that it cannot profitably sell the JLP at the $0.86 rate set forth in the Proposed Rule. The insurer's 30% share of premium on a $100,000 policy ($25.80) is insufficient to cover its statutory liabilities ($30.00 to the guaranty fund and $1.51 premium tax), let alone its other underwriting costs. The insurer would be required to cover the losses with premiums from other policies.25 Mr. Parton pointed out that the insurer could solve this problem by forcing its agents to accept a 60-40 premium split. However, Dr. Lipshutz convincingly testified that such an imposition is not easily accomplished in a competitive market. Agents would either walk away or steer their less desirable risks toward that insurer. Further, ATIF showed that the cost of performing primary title services for a JLP policy would be a little more than $100, whereas the agent's 70% share of premium on a $100,000 JLP policy at the $0.86 rate would be only $60.20.26 Cutting the agent's share to 60% would merely shift more of the loss for a $100,000 policy onto the agent. However, because the agent's costs are fixed, his 70% share would more than cover expenses on a policy written for $167,000 or more. At a 60% share, the agent would not cover expenses on any policy worth less than $195,000. Mr. Conner of ATIF and Barry Scholnik of Stewart Title agreed that no company could issue the JLP for $0.86 per $1,000 and make a profit, and that a company selling the JLP at that rate would be offering it as a loss leader. OIR countered that ATIF is not marketing the JLP anywhere in the country, and may never do so. OIR asserted that it was entitled to rely on the fact that the $0.86 per $1,000 rate was proposed by a company that is actually selling the JLP throughout the country and has engaged an actuary to make a recommendation based on actual market data. First American maintains that it can generate a profit at the proposed rate through its direct business model. The Florida JLP purchaser should not be forced to pay higher rates in order to subsidize the less efficient "member agent" business model of ATIF. Petitioners' expert, Dr. Lipshutz, discussed at length his dispute with Mr. Struzzieri's loss projection of $0.03 per $1,000 of liability for the JLP. Dr. Lipshutz made valid points regarding the long tail line and cyclical nature of title insurance versus the very recent five years' data employed by Mr. Struzzieri, which included the unlikely projection of two years with zero losses. Mr. Struzzieri conceded that his loss data from First American was not optimal. However, both experts agreed that loss experience is not the driving force in setting title insurance rates. Additionally, Mr. Struzzieri's point that defalcation losses will be virtually nonexistent with the JLP was not effectively countered by Dr. Lipshutz. Even conceding the validity of Dr. Lipshutz' critique, Mr. Struzzieri persuasively argued that any upward projection of the loss projection would have an insignificant effect on the recommended range of rates. The experts and industry witnesses agreed that expenses are the main driver of title insurance rates. Dr. Lipshutz disputed that Mr. Struzzieri performed an expense calculation at all, and certainly questioned every expense assumption upon which Mr. Struzzieri ultimately based his rate recommendation. Mr. Struzzieri first assumed that expense data for O&E reports would provide a reliable basis for a JLP expense estimate. He was forced to use this assumption because First American could provide him with no specific expense data for the JLP, a fact that undercut the rationale for OIR's reliance on the Milliman Report as based on real industry data from a company actually selling the JLP. In fact, Mr. Struzzieri used First American's JLP price data from other states only after the fact as a tool to check the reasonableness of his rate recommendation. The evidence is not entirely clear whether Mr. Struzzieri independently reached the conclusion that the two products are equivalent, or whether this assumption was provided by First American. The Milliman Report does not explain the basis for its assumed equivalence of the O&E report and the JLP beyond a simple assertion that the "level of work . . . is the same" for the two products. At the hearing, Mr. Struzzieri merely stated that he found parallels between the O&E report and the JLP that allowed him to assume their equivalence. Mr. Conner of ATIF testified that the tasks necessary to issue a JLP are "not even close" to those employed to produce an O&E report. In support of this position, Petitioners offered a detailed, step-by-step review of the JLP process versus the process involved in producing an O&E report. This review led Dr. Lipshutz to conclude that the cost of producing a JLP would be 85% higher than the cost of producing an O&E report. Dr. Lipshutz' analysis on this point was credible, the more so because OIR offered no serious criticism of or alternative to Petitioners' evidence regarding the extensive differences between the production process for the two products. The preponderance of the evidence produced at the hearing established that the Milliman Report's assumption of equivalence between the JLP and an O&E report was simply wrong. Even if it were granted that the cost of an O&E report is comparable to that of a JLP, Mr. Struzzieri's assertion that the cost of an O&E report to a lender is usually between $60 and $100 was unsupported. At the hearing, Mr. Struzzieri conceded that he had no supporting data for the assertion and was unable to name the First American employee who gave him those numbers. Dr. Lipshutz' sworn testimony that he found O&E price quotes in Florida ranging from $125 to $250 was admittedly anecdotal but even so was at least as credible as Mr. Struzzieri's undocumented hearsay cost data from an unnamed source. The preponderance of the evidence produced at the hearing established that the Milliman Report's statement of the cost of a typical O&E report was an assumption lacking empirical support. The unsupported assumptions regarding the comparability of the JLP to the O&E report and regarding the cost of an O&E report render the Milliman Report's rate recommendation a speculative exercise, not the basis for an industry-wide JLP rate. Mr. Parton testified that Mr. Struzzieri employed a great deal of actuarial judgment in making his recommendation because the JLP is a new product to Florida, and that OIR was entitled to rely on that actuarial judgment. However, Mr. Struzzieri himself qualified his report with the following: In performing this analysis we have relied on data and other information provided to us by First American Title Insurance Company. We have not audited, verified, or reviewed this data and other information for reasonableness and consistency. Such a review is beyond the scope of our assignment. If the underlying data or information is inaccurate or incomplete, the results of our analysis may likewise be inaccurate or incomplete. (Emphasis added) Petitioners did not question Mr. Struzzieri's actuarial judgment. They questioned the underlying data provided by First American to Mr. Struzzieri, and showed that data to be unsupported in the case of the JLP/O&E comparison, and unverifiable in the case of the O&E costs. Mr. Struzzieri's qualifying statement acknowledges that his conclusions are only as good as their underlying information. OIR may have been entitled to rely on the Milliman Report at the time the Proposed Rule was published, before the agency was aware of the report's flaws. However, this rule challenge hearing is a de novo proceeding, not a review of OIR's past actions. At the hearing, Petitioners established that the Milliman Report was based on faulty assumptions and inadequate data. OIR failed to respond adequately to the objections raised by Petitioners. OIR simply reiterated its position that it had the discretion to rely on Mr. Struzzieri's actuarial analysis, without really answering Petitioners' evidence that the assumptions undergirding the analysis were unsubstantiated. OIR essentially adopted the Milliman Report as its own. Mr. Parton testified that as to each of the "due consideration" ratemaking factors listed in Subsection 627.782(2), Florida Statutes, OIR derived its conclusions largely from the Milliman Report. Whatever the merits of OIR's legal reasoning regarding its statutory ratemaking responsibilities, OIR's reliance on the Milliman Report to meet those responsibilities was misplaced. OIR's only response to Petitioners' sustained attack on Mr. Struzzieri's assumptions was to reiterate its reliance on the Milliman Report. The preponderance of the evidence established that the Proposed Rule was based on unsupported data and was, therefore, arbitrary.
The Issue The issue is whether a retiree's forfeiture of Florida Retirement System (FRS) benefits authorizes Respondent to seize from unrelated remittals due Petitioner the sum of $18,271.75, which is the amount that Respondent had previously deducted from the retiree's pension benefits and remitted to Petitioner for the payment of the retiree's insurance premiums.
Findings Of Fact Employed by Petitioner in April 1974, Garfield Perry participated in the FRS pension plan. On or about October 31, 2009, Mr. Perry terminated his employment and began receiving his monthly FRS pension benefit. Two months earlier, Mr. Perry had entered into an agreement with Petitioner for it to provide post-retirement life insurance for Mr. Perry and medical and dental insurance for Mr. Perry and his wife with all three policies commencing in November 2009. While these policies were in effect, pursuant to an agreement between Petitioner and Respondent that is described below, Respondent remitted to Petitioner a portion of Mr. Perry's FRS pension benefit equal to $17,429.47 for medical and dental premiums and $842.28 for life insurance premiums, for a total of $18,271.75. Petitioner is a self-insurer for medical insurance, so, on receipt of medical insurance premiums, Petitioner pays a portion of the premiums to a third-party administrator for insurance-related services and reserves the remainder for the payment of claims. For dental and life insurance, Petitioner remits the premiums to the respective insurers. On May 7, 2014, Mr. Perry pleaded guilty to one count of bribery and extortion in the United States District Court, Southern District of Florida, in connection with his employment in Petitioner's Public Works Department. On or about July 29, 2014, the court adjudicated Mr. Perry guilty. By letter dated August 6, 2014, Respondent advised Mr. Perry that, pursuant to article II, section 8(d), of the Florida Constitution, and sections 112.3173 and 121.091(5), Florida Statutes, his FRS benefits were forfeited due to his guilty plea. Mr. Perry requested an administrative hearing on the forfeiture, and Respondent transmitted the file to DOAH, which designated the case as DOAH Case No. 14-4195. On December 31, 2014, Mr. Perry voluntarily dismissed his request for hearing prior to the final hearing, and, on January 9, 2015, Respondent issued a Final Order of Dismissal that finds, among other things, that Mr. Perry committed the criminal offenses "from in or about 2006 through in or about October 2009." The final order formally declares a forfeiture of Mr. Perry's FRS pension benefits, evidently including benefits already paid. Respondent did not provide Petitioner with a copy of the August 6, 2014, letter, the Final Order of Dismissal, or any of the pleadings in DOAH Case No. 14-4195. The present record does not indicate if Petitioner had actual notice of the forfeiture process. However, this case likely represents the first time that Respondent has attempted to recover insurance premiums that it has remitted to an agency or company following the retiree's forfeiture of retirement benefits, and it is unlikely that Petitioner was aware of its potential liability to repay these amounts until April 1, 2016, as described below. This potential liability arguably arises from a Payroll Deduction Agreement entered into by Petitioner and Respondent. The agreement allows a retiree to authorize Respondent to deduct monthly from his pension benefit an amount equal to his insurance premiums and to remit this sum to Petitioner, so that it can pay the retiree's premiums. In this case, Respondent remitted insurance premiums to Petitioner from November 2009 through October 2012 and allocated them in the manner set forth above in paragraph 2. Three and one-half years after the last remittal that included any sums for Mr. Perry's insurance premiums, almost two years after Mr. Perry's guilty plea, and about 15 months after the final order declaring the forfeiture, Respondent withheld $18,271.75 from Respondent's March 2016 consolidated remittal to Petitioner on the account of other retirees in an attempt to recover the remittals that Respondent had made to Petitioner to pay Mr. Perry's insurance premiums. The Payroll Deduction Agreement is a form prepared by Respondent that is signed by the agency or company seeking to receive remittals for its FRS retirees. Under the agreement, which has a signature line only for the agency or company and not Respondent, the agency or company agrees to preserve the confidentiality of the information, assume responsibility for the accuracy of the premium deductions, and notify Respondent timely of the discontinuation of this payroll deduction service. An employee of Petitioner signed the Payroll Deduction Agreement on April 27, 2009. The Payroll Deduction Agreement requires the agency or company to accept the "Procedures for Admitting Insurance Providers for Retired Payroll Deduction." The procedures document states that Respondent offers the convenience of payroll deduction of insurance premiums as a service to FRS pension recipients. Only two paragraphs of this document address post-deduction adjustments: 11. If a retiree's insurance premium is deducted incorrectly for any reason (i.e.-- overpayment of amount, policy cancelled, administrative error, etc.), the Insurance provider company or FRS agency is responsible for refunding the premium amount to the retiree. 13. [1] If a retirement benefit is cancelled by the Division of Retirement, the corresponding insurance premium that was deducted from that same dated payment is recovered from the following month's consolidated insurance payment. Reasons for cancellations include payee deaths, [sic] cancelling retirement. When determining the amount of insurance premiums to be reimbursed to families of deceased members, please note that the Division cannot determine when a death will be reported or when funds will be funds will be returned [sic] from banks (resulting in cancellations). [4] There are occasions when a report of death is received months after a retiree's death. [5] If payments for the deceased are still outstanding, they most likely will be cancelled. A common example follows: Example: Payee dies 1/5/09. Family reports death to the Division on 4/1/09. Retiree was only due payments through the month of January. Since the February and March payments are still outstanding, these paper checks are cancelled by the Division of Retirement. This cancellation action recovers the 2/27/09 and 3/31/09 premium deductions from the 4/30/09 consolidated payment. A credit entry will also appear on the April 2009 report of retiree insurance deductions. Please Note: We recommend that you contact the Division of Retirement to inquire about possible payment cancellations prior to processing premium reimbursements. Paragraph 11 of the Payroll Deduction Agreement requires that an agency or company repay the retiree any excessive premium deduction, so is irrelevant in the case of forfeiture. Paragraph 13 of the Payroll Deduction Agreement applies to the situation in which a premium deduction is unfunded because of the cessation of the pension benefit from which it is deducted. In its proposed recommended order, Petitioner argues that the application of paragraph 13 is prospective only, so it would not apply to a retroactive setoff of the type that has occurred in this case. The first sentence identifies the contingency of the cancelation of a retirement benefit and authorizes Respondent to recover its remittal of any premiums deducted from the cancelled pension benefit, but mentions a recovery or setoff only in the month following the cancelation. This establishes the kind of liability that Respondent seeks to impose on Petitioner, but only for the brief period of one month. Obviously, the willingness of an agency or company to assume this minor liability for the convenience of its retirees does not imply a willingness to assume a much larger liability spanning several months or even years of remittals. The second sentence cites two common reasons for cancelation: the death of the retiree and the cancellation of the pension benefit by the retiree. The use of "includes," as well as the insertion of a comma in place of "and" or "or," suggests that these two reasons are illustrative, not exhaustive. Even so, the second sentence does not add the reason of forfeiture, and, at this point in paragraph 13, the details of the parties' agreement concerning a forfeiture has not been explicitly addressed. The third and fourth sentences address only the contingency of the death of the retiree, in which case Respondent recovers unearned premiums that Respondent intends to remit to the estate of the retiree--in most cases, one assumes, indirectly to the families of the deceased member. Typically, insurers are not exposed to the risk of insured losses after the death of a retiree--even a life insurer's exposure ends after the insured's death and payment of the death benefits--so any premiums paid after death are unearned and should be refunded to the proper party. The warning that Respondent may not learn of the retiree's death for many months suggests a longer period may be available for retroactive adjustments, but this warning applies only to the contingency of death, again, where the insurers are obligated to refund unearned premiums. The fifth sentence also addresses only the contingency of the death of a retiree and seems to provide only that Respondent will cancel any pension benefits or premium remittals still outstanding at the time of the retiree's death. The example illustrates a three-month delay in the receipt of notification of a retiree's death followed by the cancellation of the pension benefits issued in the preceding two months, which presumably could not have been lawfully presented for payment by anyone besides the deceased retiree. In this case, Respondent would issue a corresponding credit entry on the next month's report of premium deductions made on account of the retiree. The procedures document thus fails to address the contingency of forfeiture. The provisions applicable to the contingencies of the death of the retiree and the retiree's cancellation of pension benefits are a poor fit for the contingency of forfeiture. Respondent has previously recovered income tax withheld on paid pension benefits following a forfeiture, but the recovery was limited to the period during which an amended personal income tax return could be filed--the effect being that the amount could be effectively recovered in the form of a tax refund from the Internal Revenue Service, rather than from an agency or company.
Recommendation It is RECOMMENDED that the Department of Management Services enter a final order dismissing the Petition Requesting an Administrative Hearing filed on August 17, 2016. DONE AND ENTERED this 8th day of February, 2017, in Tallahassee, Leon County, Florida. S Robert E. Meale 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 8th day of February, 2017. COPIES FURNISHED: Veronica E. Donnelly, Esquire Offices of the General Counsel Department of Management Services 4050 Esplanade Way, Suite 160 Tallahassee, Florida 32399-0950 (eServed) Joni A. Mosely, Esquire Assistant County Attorney Miami-Dade County Attorney's Office Stephen P. Clark Center, Suite 2810 111 Northwest 1st Street Miami, Florida 33128-1993 (eServed) Elizabeth Stevens, Director Division of Retirement Department of Management Services Post Office Box 9000 Tallahassee, Florida 32315-9000 (eServed) J. Andrew Atkinson, General Counsel Office of the General Counsel Department of Management Services 4050 Esplanade Way, Suite 160 Tallahassee, Florida 32399-0950 (eServed)
Findings Of Fact Upon consideration of the oral and documentary evidence adduced at the hearing, the following facts are found: At all times relevant to this proceeding, the respondent Frank Cimino, Jr. was licensed as an ordinary life, ordinary life including disability and dental health plan insurance agent. Respondent was also the president and incorporator of National Consumer Investment Counselors, Inc., a Florida corporation doing business at Post Office Box 1520, Brandon, Florida. Charles R. Ritzi is an insurance salesman employed at National Consumer Investment Counselors, Inc., and respondent is his supervisor. On or about November 2, 1979, Mr. Ritzi went to the home of Edward Kimball for the purpose of discussing insurance with him. He received from Mr. Kimball his other existing insurance policies and took them back to his office to analyze and compare their benefits, costs and terms with a policy which could be provided by respondent's corporation. Among the policies taken was Mr. Kimball's State Farm Insurance Company "IRA" annuity policy number 4,664,836. Several days later, Mr. Ritzi and respondent returned to Mr. Kimball's residence. Mr. Kimball made a decision to purchase an insurance Policy from respondent and numerous forms were signed by Mr. Kimball. These forms were then taken back to respondent's office and processed. Mr. Kimball did not sign a cash surrender form for his State Farm "IRA" annuity policy and he did not intend for that policy to be cancelled. On December 6, 1979, the offices of State Farm Life Insurance Company received in the mail a cash surrender request form on Edward Kimball' s "IRA" annuity policy number 4,664,836. Mr. Kimball's name appeared on the signature line of the form. The form also contained a change of mailing address section in which had been written the respondent's business address. The form constitutes a request for a withdrawal of dividends and surrender of the policy. By the terms of the policy, only the owner of the policy may make such a request. The "IRA" annuity policy funds a retirement plan. If the request form had been processed, there would have been a penalty imposed by the Internal Revenue Service for a premature distribution of funds and the funds distributed would have been treated as ordinary income for tax purposes. State Farm sent a service agent to Mr. Kimball's residence and it was discovered that Mr. Kimball did not desire to give up his "IRA" policy number 4,664,836, and that he did not sign the cash surrender request form. A handwriting expert confirmed that the handwriting appearing on the line entitled "Signature of Policyowner" was not the signature of Mr. Kimball. It is concluded as an ultimate finding of fact that respondent or an employee acting under his supervision signed the name of Edward Kimball, Jr. appearing on the State Farm cash surrender form and transmitted sold form to State Farm without the knowledge or consent of Mr. Kimball, the policy owner. In February of 1980, respondent placed an advertisement in the East Hillsborough Edition of The Tampa Tribune, a newspaper with a circulation of approximately 36,000. The advertisement guaranteed the reader that: "...if you are insurable and own any personal, ordinary life insurance, regardless of the company, we can show you a method of rearranging your program in a way that will: Increase the amount of money which would be paid to your beneficiary in the event of your death. 2. Increase the amount of cash available for retirement [sic], 3. Retain all of your existing guarantees and benefits and 4. We can do all this with no increase in premium." The four guarantees mentioned in the advertisement may not be capable of performance in all life insurance policies. However, it is possible for a qualified agent to accomplish the four guarantees in personal ordinary cash value life insurance policies. The guarantees are made to those persons who are insurable and who own personal, ordinary life insurance.
Recommendation Based upon the findings of fact and conclusions of law recited herein, it is RECOMMENDED THAT: The charges in the Administrative Complaint relating to a Penn Mutual Life Insurance Whole Life Policy be dismissed; Count II of the Administrative Complaint relating to an advertisement appearing in The Tampa Tribune be dismissed; Respondent be found guilty of violating Florida Statutes, Sections 626.611(4),(5),(7),(9), and (13) and 626.9541(1)(f); and Pursuant to Section 626.611, Florida Statutes, the insurance licenses presently held by the respondent be suspended for a period of one (1) year. Respectfully submitted and entered this 6th day of February, 1981, in Tallahassee, Florida. DIANE D. TERMOR 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 6th day of February, 1981. COPIES FURNISHED: Richard P. Harris, Esquire Department of Insurance 428-A Larson Building Tallahassee, Florida 32301 Frank Cimino, Jr. Post Office Box 1520 Brandon, Florida 33511 Honorable Bill Gunter Office of Treasurer Insurance Commissioner The Capitol Tallahassee, Florida 32301
Findings Of Fact On November 13, 1992, Hale Intermodal Transport Co., a motor carrier, requested that the Department of Insurance review the decision of Hale's workers' compensation insurance carrier, Liberty Mutual Insurance Co., to include the payroll of Hale's Florida owner/operators in calculating the workers' compensation insurance premium due from Hale to Liberty Mutual. On May 17, 1993, the Department stated it was removing itself from the dispute and recommended that the dispute be "addressed through the appeals process." Accordingly, Hale sought a review by the Board of Governors of the Florida Workers' Compensation Insurance Plan (hereinafter referred to as "Board of Governors"). On July 23, 1993, the Board of Governors, by a vote of three in favor, one against, and one abstention, decided that Hale's Florida owner/operators should be considered independent contractors and that their payroll should not be considered by Liberty Mutual in determining the workers' compensation insurance premium owed to Liberty Mutual by Hale. Thereafter, as provided in Section 627.291(2), F.S., Liberty Mutual requested that the Department review the Board of Governors' decision. On August 30, 1993, Liberty Mutual sought a formal hearing pursuant to Section 120.57(1) F.S. The dispute was initially referred to the Division of Administrative Hearings (DOAH) by the Department of Insurance which requested that DOAH conduct a formal hearing pursuant to Section 627.291, F.S. In its referral letter, the agency noted that Liberty Mutual had not waived its right to a Section 120.57(1) F.S. proceeding. By a Recommended Order of Dismissal entered January 11, 1994, Hearing Officer Larry J. Sartin concluded that DOAH did not have jurisdiction over the matter because the Department of Insurance had not taken any "agency action" in the case. Apparently, no final order was ever entered in response to the January 11, 1994 recommendation of dismissal. Rather, The Florida Department of Insurance's internal hearing officer reviewed the case and, on June 13, 1995, issued a "Report, Findings Conclusions and Recommendations of the Hearing Examiner." In his report, the agency's internal informal hearing officer concluded that as an insurer, Liberty Mutual did not have standing under Section 627.291 F.S. to appeal the Board of Governors' decision regarding whether Hale's Florida drivers were "employees" or "independent contractors." The agency's hearing officer's ruling was based upon his interpretation of the legislative intent of Section 627.291(2) F.S., which interpretation was made without the hearing officer having the benefit of legislative history. On February 22, 1996, the agency issued its "Order Affirming the Report, Finding, Conclusions and Recommendation of the Hearing Examiner." Appended to that order was an election of rights statement form which set forth Liberty Mutual's options should it wish to appeal the Department's order which constituted the agency's "proposed agency action" as that term is used in Chapter 120 F.S. and which, in effect, affirmed the agency's internal hearing officer's report/order. Liberty Mutual elected to have the matter referred to DOAH for a Section 120.57(1) F.S. proceeding upon the disputed issues of material fact. The dispute was then referred to DOAH and became the instant DOAH Case No. 96- 1586. Following Hale Intermodal Transport Co.'s intervention herein, the case was set for formal hearing. Eventually, the parties filed a Joint Prehearing Stipulation. That Joint Prehearing Stipulation specified that there were only two disputed facts raised by Liberty Mutual's petition in the instant case, and that these two disputed facts had since been resolved among the parties, to the effect that: Liberty Mutual was and is not a "member" of NCCI. Liberty Mutual was and is a member of the assigned risk pool and was a member of the Board of Governors' panel to which the issue of Hale's independent contractor drivers was first present. (sic) Liberty Mutual's representative on the Board of Governors' panel abstained and did not vote in the decision. The Joint Prehearing Stipulation also specified that none of the parties would call witnesses or offer exhibits at formal hearing before DOAH. The parties further stipulated that the only issue remaining was whether or not Petitioner Liberty Mutual had "standing" pursuant to Section 627.291(2) F.S. to request a review of the Board of Governors' decision. Respondent Department of Insurance then moved to dismiss itself as a party, claiming that it was not a real party in interest and that under Section 627.291 F.S., it must act as arbitrator/judge and therefore should not be required to appear as an adversarial Respondent in the instant Section 120.57(1) F.S. proceeding before DOAH. Oral argument was required on the pending motion. During that hearing, the undersigned requested that the parties explain how DOAH could have jurisdiction of a cause with no disputed issues of material fact. The undersigned further suggested that the issue of "standing" is only a part of the larger issue of "jurisdiction" which is a mixed question of law and fact; that perhaps there was a flaw in the agency's determination in its proposed final agency action to the effect that only Hale (the employer) had standing to request a due process hearing whereas Liberty Mutual (the insurer) did not have standing to request a due process hearing for the purpose of determining the employer and insurance carrier's respective rights under Section 627.291(2) F.S. and, therefore, perhaps Liberty Mutual's petition could be interpreted to be seeking a hearing on the merits to consider the parties' respective rights on the rating issue; and that in a Section 120.57(1) F.S. proceeding the agency must always be a litigant when the agency proposes any final agency action, i.e. in this instance, the implementation by a final order of the whole of its internal hearing officer's recommended order. Subsequent to oral argument, the scheduled Section 120.57(1) F.S. formal hearing was cancelled so that the parties could supplement the record by filing additional documents, copies of any statutes and rules they wished to be considered, any motion to dismiss upon allegations the joint prehearing stipulation had eliminated all disputed issues of material fact, any motion to amend the petition herein, and any memoranda addressing jurisdiction and the scope of formal hearing pursuant to Section 120.57(1) F.S. The undersigned has reviewed all filings and the record and is fully advised in the premises, including but not limited to Liberty Mutual's failure to amend its petition and Hale's renewed motion to dismiss. It clearly appears that the parties have stipulated that the issue of "standing" in this instant case is purely a legal issue and that there remain no disputed issues of material fact.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Insurance enter a Final Order dismissing the petition herein. DONE AND ENTERED this 19th day of August, 1996, in Tallahassee, Florida. ELLA JANE P. 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 19th day of August, 1996. COPIES FURNISHED: Brian D. Solomon, Esquire Glenda L. Thornton, Esquire Post Office Box 1454 Tallahassee, Florida 32301 John Swyers, Esquire DEPARTMENT OF INSURANCE 200 East Gaines Street Tallahassee, Florida 32399-0333 Edward J. Kiley, Esquire GROVE, JASKIEWICZ & COBERT, P.A. 1730 "M" Street, Northwest Suite 400 Washington, D.C. 20036-4579 Bill Nelson, State Treasurer and Insurance Commissioner DEPARTMENT OF INSURANCE The Capitol, Plaza Level Tallahassee, Florida 32399-0300 Dan Sumner, Esquire DEPARTMENT OF INSURANCE The Capitol, PL-11 Tallahassee, Florida 32399-0300
Findings Of Fact Respondent holds a property and casualty insurance license, life and health insurance license, and life insurance license for the State of Florida. She has held her property and casualty license for about 20 years. In 1976, she was employed as an agent for the Orlando office of Commonwealth insurance agency, which she purchased in 1977 or 1978. She continues to own the Commonwealth agency, which is the agency involved in this case. Respondent has never previously been disciplined. In 1979 or 1980, Respondent was appointed to the board of directors of the Local Independent Agents Association, Central Florida chapter. She has continuously served on the board of directors of the organization ever since. She served as president of the association until September, 1991, when her term expired. During her tenure as president, the local association won the Walter H. Bennett award as the best local association in the country. Since May, 1986, Commonwealth had carried the insurance for the owner of the subject premises, which is a 12,000 square foot commercial block building located at 923 West Church Street in Orlando. In July, 1987, the insurer refused to renew the policy on the grounds of the age of the building. Ruth Blint of Commonwealth assured the owner that she would place the insurance with another insurer. Mrs. Blint is a longtime employee of the agency and is in charge of commercial accounts of this type. Mrs. Blint was a dependable, competent employee on whom Respondent reasonably relied. Mrs. Blint contacted Dana Roehrig and Associates Inc. (Dana Roehrig), which is an insurance wholesaler. Commonwealth had done considerable business with Dana Roehrig in the past. Dealing with a number of property and casualty agents, Dana Roehrig secures insurers for the business solicited by the agents. Dana Roehrig itself is not an insurance agent. In this case, Dana Roehrig served as the issuing agent and agreed to issue the policy on behalf of American Empire Surplus Lines. The annual premium would be $5027, excluding taxes and fees. This premium was for the above- described premises, as well as another building located next door. The policy was issued effective July 21, 1987. It shows that the producing agency is Commonwealth and the producer is Dana Roehrig. The policy was countersigned on August 12, 1987, by a representative of the insurer. On July 21, 1987, the insured gave Mrs. Blint a check in the amount of $1000 payable to Commonwealth. This represented a downpayment on the premium for the American Empire policy. The check was deposited in Commonwealth's checking account and evidently forwarded to Dana Roehrig. On July 31, 1987, Dana Roehrig issued its monthly statement to Commonwealth. The statement, which involves only the subject policy, reflects a balance due of $3700.86. The gross premium is $5027. The commission amount of $502.70 is shown beside the gross commission. Below the gross premium is a $25 policy fee, $151.56 in state tax, and a deduction entered July 31, 1987, for $1000, which represents the premium downpayment. When the commission is deducted from the other entries, the balance is, as indicated, $3700.86. The bottom of the statement reads: "Payment is due in our office by August 14, 1987." No further payments were made by the insured or Commonwealth in August. The August 31, 1987, statement is identical to the July statement except that the bottom reads: "Payment is due in our office by September 14, 1987." On September 2, 1987, the insured gave Commonwealth a check for $2885.16. This payment appears to have been in connection with the insured's decision to delete the coverage on the adjoining building, which is not otherwise related to this case. An endorsement to the policy reflects that, in consideration of a returned premium of $1126 and sales tax of $33.78, all coverages are deleted for the adjoining building. The September 30 statement shows the $3700.86 balance brought forward from the preceding statement and deductions for the returned premium and sales tax totalling $1159.78. After reducing the credit to adjust for the unearned commission of $112.60 (which was part of the original commission of $502.70 for which Commonwealth had already received credit), the net deduction arising from the deleted coverage was $1047.18. Thus, the remaining balance for the subject property was $2653.68. In addition to showing the net sum due of $944.59 on an unrelated policy, the September 30 statement contained the usual notation that payment was due by the 12th of the following month. However, the statement contained a new line showing the aging of the receivable and showing, incorrectly, that $3700.86 was due for more than 90 days. As noted above, the remaining balance was $2653.68, which was first invoiced 90 days previously. Because it has not been paid the remaining balance on the subject policy, Dana Roehrig issued a notice of cancellation sometime during the period of October 16-19, 1987. The notice, which was sent to the insured and Commonwealth, advised that the policy "is hereby cancelled" effective 12:01 a.m. October 29, 1987. It was the policy of Dana Roehrig to send such notices about ten days in advance with two or three days added for mailing. One purpose of the notice is to allow the insured and agency to make the payment before the deadline and avoid cancellation of the policy. However, the policy of Dana Roehrig is not to reinstate policies if payments are received after the effective date of cancellation. Upon receiving the notice of cancellation, the insured immediately contacted Mrs. Blint. She assured him not to be concerned and that all would be taken care of. She told him that the property was still insured. The insured reasonably relied upon this information. The next time that the insured became involved was when the building's ceiling collapsed in June, 1988. He called Mrs. Blint to report the loss. After an adjuster investigated the claim, the insured heard nothing for months. He tried to reach Respondent, but she did not return his calls. Only after hiring an attorney did the insured learn that the cancellation in October, 1987, had taken effect and the property was uninsured. Notwithstanding the cancellation of the policy, the October 31 statement was identical to the September 30 statement except that payment was due by November 12, rather than October 12, and the aging information had been deleted. By check dated November 12, 1987, Commonwealth remitted to Dana Roehrig $3598.27, which was the total amount due on the October 30 statement. Dana Roehrig deposited the check and it cleared. The November 30 statement reflected zero balances due on the subject policy, as well as on the unrelated policy. However, the last entry shows the name of the subject insured and a credit to Commonwealth of $2717 plus sales tax of $81.51 minus a commission readjustment of $271.70 for a net credit of $2526.81. The record does not explain why the net credit does not equal $2653.68, which was the net amount due. It would appear that Dana Roehrig retained the difference of $125.87 plus the downpayment of $1000 for a total of $1125.87. It is possible that this amount is intended to represent the earned premium. Endorsement #1 on the policy states that the minimum earned premium, in the event of cancellation, was $1257. By check dated December 23, 1987, Dana Roehrig issued Commonwealth a check in the amount of $2526.81. The December 31 statement reflected the payment and showed a zero balance due. The record is otherwise silent as to what transpired following the issuance of the notice of cancellation. Neither Mrs. Blint nor Dana Roehrig representatives from Orlando testified. The only direct evidence pertaining to the period between December 31, 1987, and the claim the following summer is a memorandum from a Dana Roehrig representative to Mrs. Blint dated March 24, 1988. The memorandum references the insured and states in its entirety: Per our conversation of today, attached please find the copy of the cancellation notice & also a copy of the cancellation endorsement on the above captioned, which was cancelled effective 10/29/87. If you should have any questions, please call. Regardless of the ambiguity created by the monthly statements, which were not well coordinated with the cancellation procedure, Mrs. Blint was aware in late March, 1988, that there was a problem with the policy. She should have advised the insured, who presumably could have procured other insurance. Regardless whether the June, 1988, claim would have been covered, the ensuing litigation would not have involved coverage questions arising out of the cancellation of the policy if Mrs. Blint had communicated the problem to the insured when she received the March memorandum. Following the discovery that the policy had in fact been cancelled, the insured demanded that Respondent return the previously paid premiums. Based on advice of counsel, Respondent refused to do so until a representative of Petitioner demanded that she return the premiums. At that time, she obtained a cashiers check payable to the insured, dated June 1, 1990, and in the amount of $2526.81. Although this equals the check that Dana Roehrig returned to Commonwealth in December, 1987, the insured actually paid Commonwealth $1000 down and $2885.16 for a total of $3885.16. This discrepancy appears not to have been noticed as neither Petitioner nor the insured has evidently made further demands upon Respondent for return of premiums paid. The insured ultimately commenced a legal action against Commonwealth, Dana Roehrig, and American Empire. At the time of the hearing, the litigation remains pending.
Recommendation Based on the foregoing, it is hereby recommended that the Department of Insurance and Treasurer enter a final order finding Respondent guilty of violating Sections 626.561(1) and, thus, 626.621(2), Florida Statutes, and, pursuant to Sections 626.681(1) and 626.691, Florida Statutes, imposing an administrative fine of $1002.70, and placing her insurance licenses on probation for a period of one year from the date of the final order. If Respondent fails to pay the entire fine within 30 days of the date of the final order, the final order should provide, pursuant to Section 626.681(3), Florida Statutes, that the probation is automatically replaced by a one-year suspension. RECOMMENDED this 5th day of February, 1992, in Tallahassee, Florida. ROBERT E. MEALE Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, FL 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 5th day of February, 1992. COPIES FURNISHED: Hon. Tom Gallagher State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, FL 32399-0300 Bill O'Neil, General Counsel Department of Insurance The Capitol, Plaza Level Tallahassee, FL 32399-0300 James A. Bossart Division of Legal Affairs Department of Insurance 412 Larson Building Tallahassee, FL 32399-0300 Thomas F. Woods Gatlin, Woods, et al. 1709-D Mahan Drive Tallahassee, FL 32308
Findings Of Fact At all times pertinent to this proceeding Respondent, HOWARD P. HAUSER, was eligible for licensure and licensed in this state by the Florida Department of Insurance as a Life and Health Insurance Agent; General Lines Insurance Agent - Property, Casualty, Surety, and Miscellaneous Lines; and Legal Expense Insurance Agent. At all times pertinent hereto, Respondent was the registered agent and an officer or director of Hauser and Associates Insurance Agency, Incorporated of 7770 Davie Road Extension, Hollywood, Florida. Beginning on or about January 1, 1986, and continuing through August 31, 1987, Respondent represented to one of his clients that he had obtained insurance coverage for that client's three restaurants. This representation of coverage was false. Respondent received from the client insurance premium payments of $56,550.00, more or less, for the insurance of the client's three restaurants. These funds were obtained by Respondent under false pretenses. Respondent provided the mortgagee of one of the restaurants owned by his client with a document purporting to be a certificate of insurance on that restaurant from Scotsdale Insurance Company insuring the restaurant for the period December 11, 1985, to December 11, 1986. Respondent further provided the mortgagee with a declaration sheet stating that Protective Insurance Company would insure the restaurant from January 1, 1987, to January 1, 1990. Respondent falsified these declaration sheets. Respondent's client suffered no loss, other than the loss of his premium dollars, because of Respondent's misrepresentations as to coverage. Respondent was charged with one count of Grand Theft of the Second Degree, a second degree felony, based on the dealings with his client. Respondent entered a plea of nolo contendere to the charge of Grand Theft of the Second Degree. The Circuit Court, in and for Broward County, Florida, placed Respondent on probation for a period of three years and withheld adjudication of guilt. As a condition of the Order of Probation, the court required that Respondent make restitution to his client in the amount of $56,550.00 and further required that $15,000.00 be paid toward restitution on October 24, 1988, the date Respondent entered his plea of nolo contendere and the date the court entered the Order of Probation. Respondent made a restitution payment of $15,000.00 on October 24, 1988. Respondent has been licensed by Petitioner since April 1972. Although Petitioner has received other complaints about Respondent, no formal action has been previously taken against him. Respondent has been a good citizen, except for this misconduct, and a good family man. Respondent regrets his misconduct. Respondent timely requested a formal hearing after the Administrative Complaint was served upon him.
Recommendation Based on the foregoing findings of fact and conclusions of law it is RECOMMENDED that the Department of Insurance enter a final order which revokes all licenses issued by the Department of Insurance to Respondent, Howard Paul Hauser. DONE and ENTERED this 21st of July, 1989, in Tallahassee, Leon County, Florida. CLAUDE B. ARRINGTON Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 904/488-9675 Filed with the Clerk of the Division of Administrative Hearings this 21st day of July, 1989. APPENDIX The proposed findings addressed as follows: of fact submitted on behalf of Petitioner are 1. Addressed in paragraph 1. 2. Addressed in paragraph 2. 3. Addressed in paragraph 6. 4. Addressed in paragraph 3. 5. Addressed in paragraph 4. 6. Addressed in paragraphs 3-4. The proposed findings of fact submitted on behalf of Respondent are addressed as follows: Addressed in paragraph 9. Addressed in paragraph 6. Addressed in paragraph 6. Rejected as being unnecessary to the conclusions reached. Addressed in paragraph 7. Addressed in paragraph 5. Addressed in part in paragraph 7. Rejected in part as being speculative. Rejected as being a conclusion of law and not a finding of fact. COPIES FURNISHED: Robert G. Gough, Esquire, (at the hearing) and Charles Christopher Anderson, Esquire, (on the proposed recommended order) Office of Legal Services 412 Larson Building Tallahassee, Florida 32399-0300 Gary D. Weiner, Esquire, Glendale Federal Building Suite 209 901 Southeast 17th Street Fort Lauderdale, Florida 33316 Honorable Tom Gallagher State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, FL 32399-0300 Don Dowdell, General Counsel Department of Insurance and Treasurer The Capitol, Plaza Level Tallahassee, FL 32399-0300
Findings Of Fact Petitioner is the state agency charged with licensing insurance agents of all types, regulating licensure status, and enforcing the practice standards of licensed agents within the powers granted by the Legislature in Chapter 626, Florida Statutes. At all times material to the disciplinary action, Respondent Mahle was licensed as an insurance agent in the following areas: Life and Health Insurance and Health Insurance. During the last quarter of the year 1988, New Concept Insurance, Inc. mailed brochures to residents of Naples, Florida, which stated that representatives of the company were willing to provide information about long- term care insurance, including nursing facility benefits, to interested parties. Those who wanted to learn more about the insurance were asked to return their name, address and telephone number to the company on an enclosed card. Eleanor Drown responded to the advertisement, and an appointment was arranged for Thomas DiBello and Respondent Mahle to meet with her regarding the insurance program. On November 10, 1988, Thomas DiBello and Respondent Mahle met with Ms. Drown and discussed the benefits of a long-term care policy with a nursing facility daily benefit of one hundred dollars ($100.00). After the discussion, Ms. Drown completed an application for the insurance and gave it to Respondent Mahle, along with a check for five thousand one hundred and eighty-three dollars and forty-nine cents ($5,183.49). During the insurance transaction on November 10, 1988, Ms. Drown was given a receipt which states: This receipt is given and accepted with the express understanding that the insurance you applied for will not be in force until the policy is issued and the first premium is paid in full. If your application cannot be approved, we will promptly refund your money. Application is made to the company checked (/) on this receipt. On another area of the receipt, it is clearly written, as follows: If Acknowledgement of Application does not reach you within 20 days, write to: Mutual Protective Insurance Company, 151 South 75th Street, Omaha, Nebraska 68124. The Respondent Mahle did not forward the application and the check completed by Ms. Drown to Mutual Protective Insurance Company. The check issued by Ms. Drown to Mutual Protective Insurance Company was deposited into the account of New Concept Insurance, Inc. A cashier's check for the same amount of money was issued by New Concept Insurance, Inc. to Ms. Drown on March 7, 1989. The letter from New Concept that was mailed with the check represented that the check was the refund of the money paid to Mutual Protective Insurance Company by Ms. Drown. Mitigation An application for long-term care insurance from a different insurance company was sent to Ms. Drown by Respondent Mahle on March 2, 1989. Although this course of conduct was not directly responsive to the duties owed by the Respondent to Mutual Protective Insurance Company or his customer, Ms. Drown, it does demonstrate a concern about the insurance needs requested by the customer. This conduct also reveals that there was no intention to convert the funds received to the Respondent's own use, and it explains some of the delay in the return of the premium funds to the customer. The Respondent has been an insurance agent for twenty years. This was the only complaint against the Respondent the Hearing Officer was made aware of during the proceedings. The allegations in the Complaint involve a single insurance transaction.
Recommendation Accordingly, it is RECOMMENDED: That the Respondent be found guilty of one violation of Section 626.561(1), Florida Statutes, and one violation of Section 626.611(7), Florida Statutes, during a single insurance transaction. That the Respondent pay an administrative penalty of $500.00 for the two violations of the Insurance Code within thirty days of the imposition of the penalty. That the Respondent be placed upon six month's probation. During this probation period, he should file a report with the Department demonstrating the manner in which he intends to keep accurate business records which assure him, the insurance company, and the customer that he is continuously accounting for premium funds and promptly carrying out his fiduciary responsibilities. That the Respondent's requests for licensure dated October 10, 1989 and May 18, 1990, be granted. DONE and ENTERED this 12th day of September, 1990, in Tallahassee, Leon County, Florida. VERONICA E. DONNELLY 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 12th day of September, 1990. APPENDIX TO RECOMMENDED ORDER IN CASE No. 89-6040 The Petitioner's proposed findings of fact are addressed as follows: Accepted. See HO #2. Accepted. See HO #2. Accepted. Accepted. See HO #5. Accepted. See HO #5. Accepted. See HO #5. Accepted. See HO #5. Rejected. Conclusion of Law. Rejected. See HO #6. Accepted. See HO #7. Accepted. See HO #7. Accepted. See HO #7. Accept that Ms. Drown's funds remained in the insurance agency's financial accounts for four months. Reject that the interest bearing ability of these funds is relevant in any manner to this case. Respondent's proposed findings of fact are addressed as follows: Accepted. See HO #3 and #4. Accepted. See HO #5. Accepted. See HO #5. Accepted. See HO #5. Accepted. Rejected. This testimony was rejected by the hearing officer as self serving. It was not found to be credible. Rejected for the same reasons given immediately above. Accepted, but not particularly probative. Rejected. Contrary to the testimony of Ms. Drown which was believed by the hearing officer. Accepted. Rejected. Contrary to the testimony of Ms. Drown which was believed by the hearing officer. Accept that an application for Penn Treaty Insurance was sent to Ms. Drown on this date. Accepted. Rejected. Contrary to the testimony of Ms. Drown which was believed by the hearing officer. Rejected. Self serving. Not believed or found to be credible by the hearing officer. Accepted. See HO #9. COPIES FURNISHED: C. Christopher Anderson III, Esquire Department of Insurance Division of Legal Services 412 Larson Building Tallahassee, Florida 32399-0300 Mark P. Smith, Esquire GOLDBERG, GOLDSTEIN & BUCKLEY, P.A. 1515 Broadway Post Office Box 2366 Fort Myers, Florida 33902-2366 Honorable Tom Gallagher State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, Florida 32399-0300 Don Dowdell, Esquire Department of Insurance The Capitol, Plaza Level Tallahassee, Florida 32399-0300 =================================================================
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 proposed amendments to Rule 4-7.009, Florida Administrative Code, constitute an invalid exercise of delegated legislative authority. Specifically at issue in this proceeding are the proposed amendments to Rule 4-7.009 which restrict, under certain circumstances, compensation paid to sellers of credit insurance products and which require premium refunds to some purchasers of credit insurance.
Findings Of Fact Credit insurance is a form of group insurance marketed and sold to consumers by creditors or, in the case of motor vehicle financing, by vehicle dealers. The insurance can be purchased by a debtor at the time the debtor enters into a loan agreement. Credit insurance is purchased by debtors as protection against risk of loss caused by unexpected events occurring during the term of the insurance contract. Credit insurance provides for the payment of the balance of the debt upon the death or disability of the insured debtor. Otherwise stated, the benefit of such insurance to the debtor is the assurance that, if the debtor becomes unable, due to death or disability, to make the required periodic payments, the insurer will pay off the balance of a loan or other debt obligation. Sellers of credit insurance products are compensated in the form of commissions paid to sellers by insurers. Additional compensation is periodically paid by some insurers to sellers based upon the profitability of each seller's line of business. Beginning in late 1990, the Department of Insurance ("Department") proposed amendments to administrative rules relating to credit life and credit health and accident insurance products. The Petitioners have challenged the provisions of the proposed rule restricting the level of compensation paid to the sellers of credit insurance products and requiring insurers to make "experience refunds". As set forth in the Department's Notice of Change, published in the November 27, 1991 edition of the Florida Administrative Weekly (Vol. 17, No. 48), the proposed rule amendment provides in relevant part as follows: 4-7.009 Determination of Reasonableness of Benefits in Relation to Premium Charge General Standard. Under the Credit Insurance Law, benefits provided by credit insurance policies must be reasonable in relation to the premium charged. In determining whether benefits are reasonable in relation to premium, the Department shall consider loss experience, allocation of expenses, risk and contingency margins, and policy acquisition costs. This requirement is satisfied if the premium rate charged develops or may be reasonably expected to develop a loss ratio of not less than 1. (a) 55% for credit life insurance and 2. (b) 50% for credit accident and health insurance, and either the insurer does not pay compensation in excess of 30% of the net direct written premium based upon the applicable prima facie rates set forth in Rules 4-7.010 and 4-7.011, or the insurer demonstrates to the satisfaction of the Department that payment of compensation in excess of said 30% is actuarially sound. "Compensation" means money or anything else of value paid by the insurer and/or by any reinsurer to any agent, producer, creditor, or affiliated body. On the basis of relevant experience, uUse of rates not greater than those contained in Rules 4-7.010 and 4-7.011 ("prima facie rates") shall be deemed currently reasonable premium rates reasonably expected to develope the required loss ratio, subject to a later determination of experience refunds, if any, as described herein. An insurer may only file and use rates with such forms which are greater than the prima facie rates set forth in Rules 4-7.010 and 4-7.011 upon a satisfactory showing to the Department Commissioner that the use of such rates will not result on a statewide basis for that insurer of a ratio of claims incurred to premiums earned of less than the required loss ratio. Furthermore, the extent to which an actual rate is greater than that set forth may not exceed the difference between (a) claims which may be reasonably expected and (b) the product of the required loss ratio and the prima facie rates set forth in Rules 4-7.010 and 4-7.011 for the coverage being provided. (2) The Department Commissioner shall, on a triennial basis, review the loss ratio standards set forth in subsection (1), above, and the prima facie rates set forth in Rules 4-7.010 and 4-7.011 and determine therefrom the rate of expected claims on a statewide basis, compare such rate of expected claims with the rate of claims for the preceding triennium, determined from the incurred claims and earned premiums at prima facie rates reported in the annual statement supplement, and adopt the adjusted actual new statewide prima facie rates for Rules 4-7.010 and 4-7.011 to be used by insurers during the next triennium. The new rates will be set at levels that would have produced the loss ratios set forth in subsection (1), above. To make this comparison and redetermination, insurers shall report in the annual statement supplement format, each year, claims and earned premiums, separately, for business written with premiums based on Rules 4-7.010 and 4-7.011. * * * Insurers will calculate a dollar amount of loading each year based upon the insurer's earned credit life and credit accident and health premium in this state for the same year. Loading will be calculated as 45% of earned premium for life insurance and 50% of earned premium for credit accident and health insurance. For this calculation, earned premium shall be based on the rates set forth in Rules 4-7.010 and 4-7.011. Insurers shall calculate an Experience Refund Amount each year for credit life and credit accident and health insurance written in this state after the effective date of this rule. Experience Refunds can be positive or negative. Positive Experience Refunds are to be refunded in the following manner: Experience refunds are to be allocated to accounts which have positive Experience Refund Amounts in proportion to the ratio of each account's refund amount to the total of all positive refund amounts. For the purpose of this allocation, all individual policies are to be treated as one account. The Experience Refund Amount allocated to a particular account is to be refunded to all certificate holders or individual policyholders of such account in proportion to the premiums earned for each certificate holder or individual policyholder to the total of all premiums earned for such account. Earned premiums for Experience Refund purposes are to be equal to paid premiums for the calendar year less unearned premium reserves at the end of the calendar year plus unearned premiums at the beginning of the calendar year. Unearned premium reserves are to be calculated pro rata. Credit policies issued on a non-contributory basis are excluded. Non-contributory means that individual insureds pay no part of the insurance premium. Premiums are paid by the policyholder out of policyholder funds. Individual credit policies issued on a participating basis are to be excluded. All new loans insured after the effective date of this rule are subject to the Experience Refund calculation and distribution, if any. Individual refunds of less than $10 do not have to be made. Experience Refunds are to be determined for each calendar year as follows: Earned Premium, less Loading as determined above, less Incurred claims, less The sum of any carry forwards for the three previous years. An insurer that uses rates which are 10% or more below the rates set forth in Rules 4-7.010 and 4-7.011 shall not be required to calculate or make an Experience Refund. The Florida Bankers Association ("FBA") is the trade association of the Florida banking industry, many of whom sell credit insurance to their customers. The Florida Automobile Dealers Association ("FADA") is a trade association of franchised new car and truck dealers, approximately 65% of whom sell credit insurance. The Florida Recreational Vehicle Dealers Trade Association ("FRVDTA") is a trade association of recreational vehicle dealers, approximately 35% of whom sell credit insurance. The FBA, the FADA, and the FRVDTA are substantially affected by the proposed rule amendment at issue in this case. Specifically the FBA, the FADA, and the FRVDTA are substantially affected by the proposed regulation of compensation paid to sellers of credit insurance products and by the proposed requirement that, under some circumstances, refunds be made to credit insurance purchasers. The Consumer Credit Insurance Association ("CCIA") is a trade association of credit insurance companies, at least 50 of whom sell credit insurance in Florida. The CCIA is substantially affected by the proposed rule amendment provision related to premium refunds to some insureds. Credit insurance is priced and sold without regard to sex or age of the debtor. There is little underwriting of credit insurance risks. Due primarily to the age of the population and the effect of mandated coverages, Florida's credit insurance claims are higher than in other states. There are currently in excess of eighty million credit insurance policies in force in the United States. Credit insurance is sold under master policies issued by insurers to producers, such as banks and vehicle dealers. Producers sell the insurance product and maintain records of the credit insurance purchasers, who hold certificates issued under each master policy. Credit insurance premiums are based upon the amount financed by the debtor and are calculated according to rates established on a statewide basis by the Department. Credit insurers may not charge more than the prima facie rates for credit insurance, therefore, there is no benefit to consumers to "shop around" for credit insurance. Although credit insurers are not prohibited from charging less than the prima facie rates, there is no evidence that any insurer charges less than the Department's adopted rates. Since 1982, the Department-approved prima facie credit life premium rate was $.60 for every $100 financed. The rate was based on the Department's determination that a $.60 prima facie rate would result in insurers paying out approximately 60% of premium dollars in claims paid to insureds, and that a 60% "loss ratio" was reasonable. The "loss ratio" is the fraction of premium dollars paid out in claims. The $.60 prima facie rate did not yield a 60% loss ratio. The loss ratios for some insurers was substantially less that 60%. On September 1, 1991, the Department reduced the prima facie credit life and credit health and accident rates. In establishing new prima facie rates, the Department established a 55% loss ratio for credit life insurance and a 50% loss ratio for credit disability. The revised prima facie rates are based upon data from calendar years 1986, 1987 and 1988. Such data includes information related to paid claims, earned premium, and insurer administrative overhead expenses. The setting of such rates is an actuarial exercise intended to provide a reasonable projection of premium rates and loss ratios. There is no evidence that the revised prima facie rates result in premiums which are excessive in relationship to the amount of the loans insured. The revised prima facie rates are reasonably expected to yield the revised loss ratios. The rule provides a triennial review mechanism to ascertain whether the expected loss ratios are being met and to adjust prima facie rates if such is indicated. The review is a reasonable method of assuring that such loss ratios are met. Currently, commissions are paid by insurers to producers (i.e. banks and dealers) as compensation for selling the product. The amount of commission is determined by agreement between the insurer and producer. Commissions for the sale of credit insurance vary widely and, in some cases (generally involving the sale of credit insurance related to automobile purchases) may be as high as 60% of the premium paid by the consumer. In addition to payment of commissions, some insurers retrospectively compensate producers by periodically paying an amount based upon the profitability of each producer's business. Compensation levels largely determine which credit insurer's product a producer chooses to sell. The proposed rule limits total compensation levels, absent specific authorization by the Department, to 30% of the net direct written premium based upon the applicable prima facie rates. Compensation levels have no impact on the premiums charged to consumers purchasing credit insurance. Premiums charged are based on the Department's prima facie rates. The proposed rule permits a credit insurance company to exceed the 30% compensation restriction where the insurer can establish that the payment of compensation in excess of the 30% is "actuarially sound". The determination of whether payment of commission in excess of 30% is "actuarially sound" is left to the discretion of the Department. There is no statutory, rule, or commonly accepted definition of the term, although the Department's actuary stated that a product determined to be "actuarially sound" would be a "self-supporting" product, either profitable or "breaking even". He further opined that he would consider investment income in a determination of actuarial soundness, although the proposed rule does not require such consideration. The Department's purpose in enacting the proposed compensation restriction was to protect insurers from insolvency and financial instability. The commission restriction was not designed to protect against excessive charges in relation to the amount of the loan, duplication or overlapping of insurance, or the loss of a borrower's funds by short term cancellation of a policy. The commission restriction was not intended to, and will not, ensure that the loss ratios deemed reasonable by the Department will be met. In adopting a 30% compensation restriction, the Department calculated that, assuming the 55% loss ratio was met, $.55 of each premium dollar would be paid in claims. The Department assumed that $.15 of each premium dollar would cover overhead expenses and profit. According to the Department, the remaining $.30 is the most an insurer could pay as compensation to the producers without affecting the solvency of the insurer. In calculating the commission restriction, the Department did not consider the effect of an insurer's investment income on the ability to pay commission. There is no evidence that payment of commissions in excess of 30% of net direct written premiums has adversely affected the solvency of any credit insurer doing business in Florida. There is, in fact, no history of credit insurer insolvency in Florida. Nationwide, there has been little problem of insolvency in the credit insurer business, with no more than four insurers having become insolvent. In each of those cases, the insolvency resulted from poor management of assets, and was not related to payment of excess commissions to producers. The Department asserts that, absent such restrictions, insurers will pay excessive compensation in order to compete for producers, and that such excess compensation, coupled with administrative expenses and a 55% loss ratio, will threaten the solvency of the companies. The assertion is not supported by the greater weight of credible evidence. The proposed rule also requires insurers, under some circumstances, to make experience-based refunds to credit insurance purchasers. In determining whether a refund is required, an insurer first calculates whether the insurer has met or exceeded the 55% loss ratio for the prior year. If the loss ratio is met or exceeded, no refunds are required. If an insurer determines that the 55% loss ratio was not met, the insurer calculates the difference between targeted 55% loss ratio and the actual percentage of premium dollars paid out in claims. The insurer then identifies each producer account which had a loss ratio of less than 55%, determines the identity and location of each certificate holder (insured) in each producer's account, and makes a refund to each identified certificate holder. Individual refunds of less than $10 to an individual consumer are not required. The proposed rule permits insurers to carry excess losses forward for a period of three year, to offset years when the targeted loss ratio is not met. However, such excess losses may not be carried forward beyond the three year period. Whether a consumer receives a refund is unrelated to the premium paid by the consumer. An individual consumer ("A") purchasing a car and credit insurance at Dealer "A" may receive a refund, while a Consumer "B" purchasing the same car and credit insurance from Dealer "B" may not receive a refund, if Dealer A's line of business with the insurer meets the target loss ratio and Dealer B's line of business with the same insurer fails to meet the loss ratio. The benefit of the credit insurance is the assurance that, under certain conditions, the insurer will pay off the balance of a loan or other debt obligation. If Consumer A receives a refund and Consumer B does not, Consumer A pays more than Consumer B for the same insurance protection. The Department's purpose in enacting the proposed experience refund was to ensure that the 55% loss ratio would be met. However, the experience refund provision, combined with the three year limit for charging off excess losses, will eventually result in loss ratios which will exceed the 55% ratio which the Department has determined to be reasonable. There is no need for experience refunds when the prima facie rates established by the Department are appropriately set. Such rates are designed to produce an acceptable loss ratio. It is reasonable to believe that the Department's revised prima facie rates will result in acceptable loss ratios. The refund proposal was not designed to protect against excessive charges in relation to the amount of the loan, duplication or overlapping of insurance, or the loss of a borrower's funds by short term cancellation of a policy. The proposed rule provides that an insurer charging a premium based on rates at least 10% below the prima facie rates are not required to calculate the experience refund. There is no credible rationale supporting the use of 10% as the threshold under which an insurer escapes the refund calculation, although the resulting loss ratio likely approaches the 60% loss ratio suggested by the National Association of Insurance Commissioners. Of the actuaries testifying at hearing, one opined that a rate 10% less than the prima facie rate was viable, the other opined that it was not. Because the Department's revised prima facie rates are reasonably calculated to result in a 55% loss ratio, an insurer charging less than the prima facie rate will likely exceed the 55% loss ratio. In connection with the final version of the proposed rule, the Department did not prepare an economic impact statement. The Department did not estimate the costs of insurer compliance with the refund provisions. The expense required of insurers in order to establish experience refund payment systems is significant. Information management systems will require extensive modification to permit such data to be maintained. Substantial amounts of data, which is not currently provided to insurers, must be collected and accurately maintained to permit refunds to be made. Such costs were not included in administrative expenses considered by the Department when the revised prima facie rates were established. Presently, credit insurers maintain limited data related to insureds purchasing credit insurance in connection with installment loans. Although such data may be initially collected by producers, insurers are typically provided only with the name of the debtor and loan number. Data is transmitted to insurers either electronically or through paper files. In either case, data must be converted to usable form by insurers. In approximately seventy percent of credit insurance business, addresses of insureds are not transmitted to insurers. There is no credible evidence that current addresses of insureds are continuously maintained by either insurer or producer in installment debt insurance, since there is little need to question original data as long as periodic payments are being timely made. In a form of credit insurance known as "monthly outstanding balance" insurance, bulk accounts are received by insurers, who generally does not receive either names or addresses of insureds. Consumers whose monthly outstanding balance indebtedness is insured are more likely to provide producer/creditors with current addresses, but such data is not provided to insurers. As to credit insurers, although most insurers currently process refund checks, the additional expense of establishing or modifying systems capable of compliance with the proposed refund requirement could amount to as much as five percent of each premium dollar. One bank official estimated that, as to his bank, the expense of complying with the refund provisions would include an initial cost of $1.1 million and an annual cost of $350,000 to $500,000. A credit insurance information systems and processing executive estimated that the 31 producers writing business for his company would incur costs of $1,860,000 to comply with the rule, and that his own company's costs would be in the range of $4-5 million. The Department suggested that, rather than modify existing mainframe computer systems, such data could be maintained by insurers on personal computers and microcomputer networks. The Department asserted that such systems would be less expensive and require less modification than the process outlined by industry representatives. However, there is credible testimony establishing that significant resources would be involved in determining whether such conversion to microcomputers would be feasible or warranted. In any event, there is no evidence that such conversion could be accomplished in a timely manner permitting the insurers to comply with the proposed rule requirements. The greater weight of the evidence establishes that the expenses estimated by the industry representatives are reasonable based upon the existing management information systems maintained by the industry.
