The Issue The issue in these consolidated cases is whether the Agency for Health Care Administration ("AHCA") properly disallowed Petitioners' expense for liability insurance and accrued contingent liability costs contained in AHCA's audit of Petitioners' Medicaid cost reports.
Findings Of Fact Based upon the oral and documentary evidence presented at the final hearing, and on the entire record of this proceeding, the following findings of fact are made: Petitioners operate licensed nursing homes that participate in the Florida Medicaid program as institutional providers. The 14 Palm Gardens facilities are limited liability companies operating as subsidiaries of New Rochelle Administrators, LLC, which also provides the facilities with management services under a management contract. AHCA is the single state agency responsible for administering the Florida Medicaid program. One of AHCA's duties is to audit Medicaid cost reports submitted by providers participating in the Medicaid program. During the audit period, Petitioners provided services to Medicaid beneficiaries pursuant to Institutional Medicaid Provider Agreements that they entered into with AHCA. The Provider Agreements contained the following relevant provision: (3) Compliance. The provider agrees to comply with local, state, and federal laws, as well as rules, regulations, and statements of policy applicable to the Medicaid program, including Medicaid Provider Handbooks issued by AHCA. Section 409.908, Florida Statutes (2002)1, provided in relevant part: Reimbursement of Medicaid providers.-- Subject to specific appropriations, the agency shall reimburse Medicaid providers, in accordance with state and federal law, according to methodologies set forth in the rules of the agency and in policy manuals and handbooks incorporated by reference therein. These methodologies may include fee schedules, reimbursement methods based on cost reporting, negotiated fees, competitive bidding pursuant to s. 287.057, and other mechanisms the agency considers efficient and effective for purchasing services or goods on behalf of recipients. . . . * * * (2)(a)1. Reimbursement to nursing homes licensed under part II of chapter 400 . . . must be made prospectively. . . . * * * (b) Subject to any limitations or directions provided for in the General Appropriations Act, the agency shall establish and implement a Florida Title XIX Long-Term Care Reimbursement Plan (Medicaid) for nursing home care in order to provide care and services in conformance with the applicable state and federal laws, rules, regulations, and quality and safety standards and to ensure that individuals eligible for medical assistance have reasonable geographic access to such care. . . . AHCA has adopted the Title XIX Long-Term Care Reimbursement Plan (the "Plan") by reference in Florida Administrative Code Rule 59G-6.010. The Plan incorporates the Centers for Medicare and Medicaid Services ("CMS") Publication 15-1, also called the Provider Reimbursement Manual (the "Manual" or "PRM"), which provides "guidelines and policies to implement Medicare regulations which set forth principles for determining the reasonable cost of provider services furnished under the Health Insurance for the Aged Act of l965, as amended." CMS Pub. 15-1, Foreword, p. I. The audit period in these cases spans two versions of the Plan: version XXIII, effective July 1, 2002, and version XXIV, effective January 1, 2003. It is unnecessary to distinguish between the two versions of the Plan because their language is identical as to the provisions relevant to these cases. Section I of the Plan, "Cost Finding and Cost Reporting," provides as follows, in relevant part: The cost report shall be prepared by a Certified Public Accountant in accordance with chapter 409.908, Florida Statutes, on the form prescribed in section I.A. [AHCA form 5100-000, Rev. 7-1-90], and on the accrual basis of accounting in accordance with generally accepted accounting principles as established by the American Institute of Certified Public Accountants (AICPA) as incorporated by reference in Rule 61H1-20.007, F.A.C., the methods of reimbursement in accordance with Medicare (Title XVIII) Principles of Reimbursement, the Provider Reimbursement Manual (CMS-PUB. 15-1)(1993) incorporated herein by reference except as modified by the Florida Title XIX Long Term Care Reimbursement Plan and State of Florida Administrative Rules. . . . Section III of the Plan, "Allowable Costs," provides as follows, in relevant part: Implicit in any definition of allowable costs is that those costs shall not exceed what a prudent and cost-conscious buyer pays for a given service or item. If costs are determined by AHCA, utilizing the Title XVIII Principles of Reimbursement, CMS-PUB. 15-1 (1993) and this plan, to exceed the level that a prudent buyer would incur, then the excess costs shall not be reimbursable under the plan. The Plan is a cost based prospective reimbursement plan. The Plan uses historical data from cost reports to establish provider reimbursement rates. The "prospective" feature is an upward adjustment to historical costs to establish reimbursement rates for subsequent rate semesters.2 The Plan establishes limits on reimbursement of costs, including reimbursement ceilings and targets. AHCA establishes reimbursement ceilings for nursing homes based on the size and location of the facilities. The ceilings are determined prospectively, on a semiannual basis. "Targets" limit the inflationary increase in reimbursement rates from one semester to the next and limit a provider's allowable costs for reimbursement purposes. If a provider's costs exceed the target, then those costs are not factored into the reimbursement rate and must be absorbed by the provider. A nursing home is required to file cost reports. The costs identified in the cost reports are converted into per diem rates in four components: the operating component; the direct care component; the indirect care component; and the property component. GL/PL insurance costs fall under the operating component. Once the per diem rate is established for each component, the nursing home's reimbursement rate is set at the lowest of four limitations: the facility's costs; the facility's target; the statewide cost ceiling based on the size of the facility and its region; or the statewide target, also based on the size and location of the facility. The facility's target is based on the initial cost report submitted by that facility. The initial per diem established pursuant to the initial cost report becomes the "base rate." Once the base rate is established, AHCA sets the target by inflating the base rate forward to subsequent six- month rate semesters according to a pre-established inflation factor. Reimbursement for cost increases experienced in subsequent rate semesters is limited by the target drawn from the base rate. Thus, the facility's reimbursement for costs in future rate semesters is affected by the target limits established in the initial period cost report. Expenses that are disallowed during the establishment of the base rate cannot be reclaimed in later reimbursement periods. Petitioners entered the Medicaid program on June 29, 2002. They filed cost reports for the nine- month period from their entry into the program through February 28, 2003. These reports included all costs claimed by Petitioners under the accrual basis of accounting in rendering services to eligible Medicaid beneficiaries. In preparing their cost reports, Petitioners used the standard Medicaid Cost Report "Chart of Accounts and Description," which contains the account numbers to be used for each ledger entry, and explains the meaning of each account number. Under the general category of "Administration" are set forth several subcategories of account numbers, including "Insurance Expense." Insurance Expense is broken into five account numbers, including number 730810, "General and Professional Liability -- Third Party," which is described as "[c]osts of insurance purchased from a commercial carrier or a non-profit service corporation."3 Petitioners' cost report stated the following expenses under account number 730810: Facility Amount Palm Garden of Clearwater $145,042.00 Palm Garden of Gainesville $145,042.00 Palm Garden of Jacksonville $145,042.00 Palm Garden of Largo $171,188.00 Palm Garden of North Miami $145,042.00 Palm Garden of Ocala $217,712.00 Palm Garden of Orlando $145,042.00 Palm Garden of Pinellas $145,042.00 Palm Garden of Port St. Lucie $145,042.00 Palm Garden of Sun City $145,042.00 Palm Garden of Tampa $145,042.00 Palm Garden of Vero Beach $217,712.00 Palm Garden of West Palm Beach $231,151.00 Palm Garden of Winter Haven $145,042.00 AHCA requires that the cost reports of first-year providers undergo an audit. AHCA's contract auditing firm, Smiley & Smiley, conducted an examination4 of the cost reports of the 14 Palm Gardens nursing homes to determine whether the included costs were allowable. The American Institute of Certified Public Accountants ("AICPA") has promulgated a series of "attestation standards" to provide guidance and establish a framework for the attestation services provided by the accounting profession in various contexts. Attestation Standards 101 and 601 set out the standard an accountant relies upon in examining for governmental compliance. Smiley & Smiley examined the Palm Gardens cost reports pursuant to these standards. During the course of the audit, Smiley & Smiley made numerous requests for documentation and other information pursuant to the Medicaid provider agreement and the Plan. Petitioners provided the auditors with their general ledger, invoices, audited financial statements, bank statements, and other documentation in support of their cost reports. The examinations were finalized during the period between September 28, 2006, and October 4, 2006. The audit report issued by AHCA contained more than 2,000 individual adjustments to Petitioners' costs, which the parties to these consolidated proceedings have negotiated and narrowed to two adjustments per Palm Gardens facility.5 As noted in the Preliminary Statement above, the first adjustment at issue is AHCA's disallowance of Palm Gardens' accrual of expenses for contingent liability under the category of GL/PL insurance, where Palm Gardens could not document that it had purchased GL/PL insurance. The second adjustment at issue is ACHA's disallowance of a portion of the premium paid by Palm Gardens for the Mature Care Policies. The total amount of the adjustment at issue for each facility is set forth in the Preliminary Statement above. Of that total for each facility, $18,849.00 constituted the disallowance for the Mature Care Policies. The remainder constituted the disallowance for the accrual of GL/PL related contingent liabilities. Janette Smiley, senior partner at Smiley & Smiley and expert in Medicaid auditing, testified that Petitioners provided no documentation other than the Mature Care Policies to support the GL/PL entry in the cost reports. Ms. Smiley testified that, during much of the examination process, she understood Petitioners to be self-insured. Ms. Smiley's understanding was based in part on statements contained in Petitioners' audited financial statements. In the audited financial statement covering the period from June 28, 2002, through December 31, 2002, Note six explains Petitioners' operating leases and states as follows, in relevant part: The lease agreement requires that the Company maintain general and professional liability in specified minimum amounts. As an alternative to maintaining these levels of insurance, the lease agreement allows the Company to fund a self-insurance reserve at a per bed minimum amount. The Company chose to self-insure, and has recorded litigation reserves of approximately $1,735,000 that are included in other accrued expenses (see Note 9). As of December 31, 2002, these reserves have not been funded by the Company. . . . The referenced Note nine, titled "Commitments and Contingencies," provides as follows in relevant part: Due to the current legal environment, providers of long-term care services are experiencing significant increases in liability insurance premiums or cancellations of liability insurance coverage. Most, if not all, insurance carriers in Florida have ceased offering liability coverage altogether. The Company's Florida facilities have minimal levels of insurance coverage and are essentially self-insured. The Company has established reserves (see Note 6) that estimate its exposure to uninsured claims. Management is not currently aware of any claims that could exceed these reserves. However, the ultimate outcome of these uninsured claims cannot be determined with certainty, and could therefore have a material adverse impact on the financial position of the Company. The relevant notes in Petitioner's audited financial statement for the year ending December 31, 2003, are identical to those quoted above, except that the recorded litigation reserves were increased to $4 million. The notes provide that, as of December 31, 2003, these reserves had not been funded by Petitioners. Ms. Smiley observed that the quoted notes, while referencing "self-insurance" and the recording of litigation reserves, stated that the litigation reserves had not been funded. By e-mail dated April 21, 2005, Ms. Smiley corresponded with Stanley Swindling, the shareholder in the accounting firm Moore Stephens Lovelace, P.A., who had primary responsibility for preparing Petitioners' cost reports. Ms. Smiley noted that Petitioners' audited financial statements stated that the company "chose to self-insure" and "recorded litigation reserves," then wrote (verbatim): By definition from PRM CMS Pub 15-1 Sections 2162.5 and 2162.7 the Company does in fact have self-insurance as there is no shifting of risk. You will have to support your positioning a letter addressing the regs for self-insurance. As clearly the financial statement auditors believe this is self- insurance and have disclosed such to the financial statement users. If you cannot support the funding as required by the regs, the provider will have to support expense as "pay as you go" in accordance with [2162.6] for PL/GL. * * * Please review 2161 and 2162 and provide support based on the required compliance. If support is not complete within the regulations, amounts for IBNR [incurred but not reported] will be disallowed and we will need to have the claims paid reports from the TPA [third party administrator] (assuming there is a TPA handling the claims processing), in order to allow any expense. Section 2160 of the Manual establishes the basic insurance requirement: A. General.-- A provider participating in the Medicare program is expected to follow sound and prudent management practices, including the maintenance of an adequate insurance program to protect itself against likely losses, particularly losses so great that the provider's financial stability would be threatened. Where a provider chooses not to maintain adequate insurance protection against such losses, through the purchase of insurance, the maintenance of a self-insurance program described in §2161B, or other alternative programs described in §2162, it cannot expect the Medicare program to indemnify it for its failure to do so. . . . . . . If a provider is unable to obtain malpractice coverage, it must select one of the self-insurance alternatives in §2162 to protect itself against such risks. If one of these alternatives is not selected and the provider incurs losses, the cost of such losses and related expenses are not allowable. Section 2161.A of the Manual sets forth the general rule as to the reimbursement of insurance costs. It provides that the reasonable costs of insurance purchased from a commercial carrier or nonprofit service corporation are allowable to the extent they are "consistent with sound management practice." Reimbursement for insurance premiums is limited to the "amount of aggregate coverage offered in the insurance policy." Section 2162 of the Manual provides as follows, in relevant part: PROVIDER COSTS FOR MALPRACTICE AND COMPREHENSIVE GENERAL LIABILITY PROTECTION, UNEMPLOYMENT COMPENSATION, WORKERS' COMPENSATION, AND EMPLOYEE HEALTH CARE INSURANCE General.-- Where provider costs incurred for protection against malpractice and comprehensive general liability . . . do not meet the requirements of §2161.A, costs incurred for that protection under other arrangements will be allowable under the conditions stated below. . . . * * * The following illustrates alternatives to full insurance coverage from commercial sources which providers, acting individually or as part of a group or a pool, can adopt to obtain malpractice, and comprehensive general liability, unemployment compensation, workers' compensation, and employee health care insurance protection: Insurance purchased from a commercial insurance company which provides coverage after a deductible or coinsurance provision has been met; Insurance purchased from a limited purpose insurance company (captive); Total self-insurance; or A combination of purchased insurance and self-insurance. . . . part: Section 2162.3 of the Manual provides: Self-Insurance.-- You may believe that it is more prudent to maintain a total self- insurance program (i.e., the assumption by you of the risk of loss) independently or as part of a group or pool rather than to obtain protection through purchased insurance coverage. If such a program meets the conditions specified in §2162.7, payments into such funds are allowable costs. Section 2162.7 of the Manual provides, in relevant Conditions Applicable to Self-Insurance.-- Definition of Self-Insurance.-- Self- insurance is a means whereby a provider(s), whether proprietary or nonproprietary, undertakes the risk to protect itself against anticipated liabilities by providing funds in an amount equivalent to liquidate those liabilities. . . . * * * Self-Insurance Fund.-- The provider or pool establishes a fund with a recognized independent fiduciary such as a bank, a trust company, or a private benefit administrator. In the case of a State or local governmental provider or pool, the State in which the provider or pool is located may act as a fiduciary. The provider or pool and fiduciary must enter into a written agreement which includes all of the following elements: General Legal Responsibility.-- The fiduciary agreement must include the appropriate legal responsibilities and obligations required by State laws. Control of Fund.-- The fiduciary must have legal title to the fund and be responsible for proper administration and control. The fiduciary cannot be related to the provider either through ownership or control as defined in Chapter 10, except where a State acts as a fiduciary for a State or local governmental provider or pool. Thus, the home office of a chain organization or a religious order of which the provider is an affiliate cannot be the fiduciary. In addition, investments which may be made by the fiduciary from the fund are limited to those approved under State law governing the use of such fund; notwithstanding this, loans by the fiduciary from the fund to the provider or persons related to the provider are not permitted. Where the State acts as fiduciary for itself or local governments, the fund cannot make loans to the State or local governments. . . . The quoted Manual provisions clarify that Ms. Smiley's message to Mr. Swindling was that Petitioners had yet to submit documentation to bring their "self-insurance" expenses within the reimbursable ambit of Sections 2161 and 2162 of the Manual. There was no indication that Petitioners had established a fund in an amount sufficient to liquidate its anticipated liabilities, or that any such funds had been placed under the control of a fiduciary. Petitioners had simply booked the reserved expenses without setting aside any cash to cover the expenses. AHCA provided extensive testimony regarding the correspondence that continued among Ms. Smiley, Mr. Swindling, and AHCA employees regarding this "self-insurance" issue. It is not necessary to set forth detailed findings as to these matters, because Petitioners ultimately conceded to Ms. Smiley that, aside from the Mutual Care policies, they did not purchase commercial insurance as described in Section 2161.A, nor did they avail themselves of the alternatives to commercial insurance described in Section 2162.A. Petitioners did not purchase commercial insurance with a deductible, did not self- insure, did not purchase insurance from a limited purpose or "captive" insurance company, or employ a combination of purchased insurance and self-insurance. Ms. Smiley eventually concluded that Petitioners had no coverage for general and professional liability losses in excess of the $25,000 value of the Mutual Care Policies. Under the cited provisions of the Manual, Petitioners' unfunded self- insurance expense was not considered allowable under the principles of reimbursement. Petitioners were uninsured, which led Ms. Smiley to further conclude that Section 2162.13 of the Manual would apply: Absence of Coverage.-- Where a provider, other than a governmental (Federal, State, or local) provider, has no insurance protection against malpractice or comprehensive general liability in conjunction with malpractice, either in the form of a limited purpose or commercial insurance policy or a self-insurance fund as described in §2162.7, any losses and related expenses incurred are not allowable. In response to this disallowance pursuant to the strict terms of the Manual, Petitioners contend that AHCA should not have limited its examination of the claimed costs to the availability of documentation that would support those costs as allowable under the Manual. Under the unique circumstances presented by their situation, Petitioners assert that AHCA should have examined the state of the nursing home industry in Florida, particularly the market for GL/PL liability insurance during the audit period, and further examined whether Petitioners had the ability to meet the insurance requirements set forth in the Manual. Petitioners assert that, in light of such an examination, AHCA should have concluded that generally accepted accounting principles ("GAAP") may properly be invoked to render the accrued contingent liabilities an allowable expense. Keith Parnell is an expert in insurance for the long- term care industry. He is a licensed insurance broker working for Hamilton Insurance Agency, which provides insurance and risk management services to about 40 percent of the Florida nursing home market. Mr. Parnell testified that during the audit period, it was impossible for nursing homes to obtain insurance in Florida. In his opinion, Petitioners could not have purchased commercial insurance during the audit period. To support this testimony, Petitioners offered a study conducted by the Florida Department of Insurance ("DOI") in 2000 that attempted to determine the status of the Florida long-term care liability insurance market for nursing homes, assisted living facilities, and continuing care retirement communities. Of the 79 companies that responded to DOI's data call, 23 reported that they had provided GL/PL coverage during the previous three years but were no longer writing policies, and only 17 reported that they were currently writing GL/PL policies. Six of the 17 reported writing no policies in 2000, and five of the 17 reported writing only one policy. The responding insurers reported writing a total of 43 policies for the year 2000, though there were approximately 677 skilled nursing facilities in Florida. On March 1, 2004, the Florida Legislature's Joint Select Committee on Nursing Homes issued a report on its study of "issues regarding the continuing liability insurance and lawsuit crisis facing Florida's long-term care facilities and to assess the impact of the reforms contained in CS/CS/CS/SB 1202 (2001)."6 The study employed data compiled from 1999 through 2003. Among the Joint Select Committee's findings was the following: In order to find out about current availability of long-term care liability insurance in Florida, the Committee solicited information from [the Office of Insurance Regulation, or] OIR within the Department of Financial Services, which is responsible for regulating insurance in Florida. At the Committee's request, OIR re-evaluated the liability insurance market and reported that there has been no appreciable change in the availability of private liability insurance over the past year. Twenty-one admitted insurance entities that once offered, or now offer, professional liability coverage for nursing homes were surveyed by OIR. Six of those entities currently offer coverage. Nine surplus lines carriers have provided 54 professional liability policies in the past year. Representatives of insurance carriers that stopped providing coverage in Florida told OIR that they are waiting until there are more reliable indicators of risk nationwide to re-enter the market. Among the Joint Select Committee's conclusions was the following: In the testimony the Committee received, there was general agreement that the quality of care in Florida nursing homes is improving, in large part due to the minimum staffing standards the Legislature adopted in SB 1202 during the 2001 Session. There was not, however, general agreement about whether or not lawsuits are abating due to the tort system changes contained in SB 1202. There was general agreement that the long-term care liability insurance market has not yet improved. After hearing the testimony, there is general agreement among the members of the Joint Select Committee that: * * * General and professional liability insurance, with actual transfer-of-risk, is virtually unavailable in Florida. "Bare- bones" policies designed to provide minimal compliance with the statutory insurance requirement are available; however, the cost often exceeds the face value of the coverage offered in the policy. This situation is a crisis which threatens the continued existence of long-term care facilities in Florida. To further support Mr. Parnell's testimony, Petitioners offered actuarial analyses of general and professional liability in long-term care performed by AON Risk Consultants, Inc. (AON) on behalf of the American Health Care Association. The AON studies analyzed nationwide trends in GL/PL for long-term care, and also examined state-specific issues for eight states identified as leading the trends in claim activity, including Florida. They provided an historical perspective of GL/PL claims in Florida during the audit period. The 2002 AON study for Florida was based on participation by entities representing 52 percent of all Florida nursing home beds. The study provided a "Loss Cost per Occupied Bed" showing GL/PL liability claims losses on a per bed basis. The 2002 study placed the loss cost for nursing homes in Florida at $10,800 per bed for the year 2001. The 2003 AON study, based on participation by entities representing 54 percent of Florida nursing home beds, placed the loss cost for nursing homes in Florida at $11,810 per bed for the year 2002. The studies showed that the cost per bed of GL/PL losses is materially higher in Florida than the rest of the United States. The nationwide loss per bed was $2,360 for the year 2001 and $2,880 for the year 2002. The GL/PL loss costs for Texas were the second-highest in the country, yet were far lower than the per bed loss for Florida ($5,460 for the year 2001 and $6,310 for the year 2002). Finally, Petitioners point to the Mature Care Policies as evidence of the crisis in GL/PL insurance availability. The aforementioned SB 1202 instituted a requirement that nursing homes maintain liability insurance coverage as a condition of licensure. See Section 22, Chapter 2001-45, Laws of Florida, codified at Subsection 400.141(20), Florida Statutes. To satisfy this requirement, Petitioners entered the commercial insurance market and purchased insurance policies for each of the 14 Palm Gardens facilities from a carrier named Mature Care Insurance Company. The policies carried a $25,000 policy limit, with a policy premium of $34,000. These were the kind of "bare bones" policies referenced by the Joint Select Committee's 2004 report. The fact that the policies cost more than they could ever pay out led Mr. Swindling, Petitioners' health care accounting and Medicaid reimbursement expert, to opine that a prudent nursing home operator in Florida at that time would not have purchased insurance, but for the statutory requirement.7 The Mature Care Policies were "bare bones" policies designed to provide minimal compliance with the statutory liability insurance coverage requirement. The policies cost Petitioners more than $37,000 in premium payments, taxes, and fees, in exchange for policy limits of $25,000. In its examination, AHCA disallowed the difference between the cost of the policy and the policy limits, then prorated the allowable costs because the audit period was nine months long and the premium paid for the Mature Care Policies was for 12 months. AHCA based its disallowance on Section 2161.A of the Manual, particularly the language which states: "Insurance premiums reimbursement is limited to the amount of aggregate coverage offered in the insurance policy." Petitioners responded that they did not enter the market and voluntarily pay a premium in excess of the policy limits. They were statutorily required to purchase this minimal amount of insurance; they were required to purchase a 12-month policy; they paid the market price8; and they should not be penalized for complying with the statute. Petitioners contend they should be reimbursed the full amount of the premiums for the Mature Care Policies, as their cost of statutory compliance. Returning to the issue of the contingent liabilities, Petitioners contend that, in light of the state of the market for GL/PL liability insurance during the audit period, AHCA should have gone beyond the strictures of the Manual to conclude that GAAP principles render the accrued contingent liabilities an allowable expense. Under GAAP, a contingent loss is a loss that is probable and can be reasonably estimated. An estimated loss from a loss contingency may be accrued by a charge to income. Statement of Financial Accounting Standards No. 5 ("FAS No. 5"), Accounting for Contingencies, provides several examples of loss contingencies, including "pending or threatened litigation" and "actual or possible claims and assessments." Petitioners assert that the contingent losses reported in their cost reports were actual costs incurred by Petitioners. The AICPA Audit and Accounting Guide for Health Care Organizations, Section 8.05, provides: The ultimate costs of malpractice claims, which include costs associated with litigating or settling claims, are accrued when the incidents that give rise to the claims occur. Estimated losses from asserted and unasserted claims are accrued either individually or on a group basis, based on the best estimates of the ultimate costs of the claims and the relationship of past reported incidents to eventual claims payments. All relevant information, including industry experience, the entity's own historical experience, the entity's existing asserted claims, and reported incidents, is used in estimating the expected amount of claims. The accrual includes an estimate of the losses that will result from unreported incidents, which are probable of having occurred before the end of the reporting period. Section 8.10 of AICPA Guide provides: Accrued unpaid claims and expenses that are expected to be paid during the normal operating cycle (generally within one year of the date of the financial statements) are classified as current liabilities. All other accrued unpaid claims and expenses are classified as non-current liabilities. As noted above, Petitioners' audited financial statements for the fiscal years ending December 31, 2002, and December 31, 2003, showed that the accrual was incurred and recorded by Petitioners during the audit period. Mr. Swindling prepared Petitioners' cost reports, based on information provided by Petitioners, including trial balances reflecting their costs, statistics on patient days, cost data related to square footage, and revenue information. Mr. Swindling advised Petitioners to include the accrued losses. He believed that the loss contingency was probable and could be reasonably estimated. The losses were probable because it was "a given in the state of Florida at that time period that nursing homes are going to get sued." Mr. Swindling testified that the accrual reflected a per bed loss amount of $1,750, which he believed to be a reasonable estimate of the contingent liabilities faced by Petitioners during the audit period. This amount was much less than the per bed loss indicated by the AON studies for Florida. Mr. Swindling used the criteria set forth in Section 8.05 of the AICPA Guide to establish the estimate. He determined that the lesser amount was adequate based on his discussions with Petitioners' management, who indicated that they had a substantial risk management program. Management also disclosed to Mr. Swindling that Petitioners' leases required $1,750 per bed in liability coverage. See Finding of Fact 22, supra. Mr. Swindling believed that the estimated loss per bed was reasonable based on the AON studies and his knowledge and experience of the state of the industry in Florida during the audit period, as further reflected in the DOI and Joint Committee on Nursing Homes materials discussed above. Mr. Swindling's opinion was that the provisions of the Manual relating to GL/PL insurance costs do not apply under these circumstances. The costs at issue in this proceeding are not general and professional liability insurance costs subject to CMS Pub. 15-1; rather, they are loss contingencies related to general and professional liability, including defense costs, litigation costs, and settlement costs. Mr. Swindling placed the loss contingency under number 730810, "General and Professional Liability -- Third Party" because, in the finite chart of accounts provided by Medicaid, that was the most appropriate place to record the cost.9 Despite the initial confusion it caused the agency's auditors, the placement of the loss contingency under number 730810 was not intended to deceive the auditors. Mr. Swindling opined that, under these circumstances, Sections 2160 through 2162 are in conflict with other provisions in the Manual relating to the "prudent buyer" concept, and further conflict with the Plan to the extent that the cited regulations "relate to a retrospective system as opposed to prospective target rate-based system." Mr. Swindling agreed that the application of Sections 2160 through 2162 to the situation presented by Petitioners would result in the disallowance of the loss contingencies. Mr. Swindling observed, however, that Sections 2160 through 2162 are Medicare regulations. Mr. Swindling testified that Medicare reimbursements are made on a retrospective basis.10 Were this situation to occur in Medicare -- in which the provider did not obtain commercial insurance, self-insurance, or establish a captive insurer -- the provider would be deemed to be operating on a pay-as-you-go basis. Though its costs might be disallowed in the current period, the provider would receive reimbursements in subsequent periods when it could prove actual payment for its losses. Mr. Swindling found a conflict in attempting to apply these Medicare rules to the prospective payment system employed by Florida Medicaid, at least under the circumstances presented by Petitioners' case. Under the prospective system, once the contingent loss is disallowed for the base period, there is no way for Petitioners ever to recover that loss in a subsequent period, even when the contingency is liquidated. During his cross-examination, Mr. Swindling explained his position as follows: . . . Medicare allows for that payment in a subsequent period. Medicaid rules would not allow that payment in the subsequent period; therefore you have conflict in the rules. When you have conflict in the rules, you revert to generally accepted accounting principles. Generally accepted accounting principles are what we did. Q. Where did you find that if there's a conflict in the rules, which I disagree with, but if there is a conflict in the rules, that you follow GAAP? Where did you get that from? I mean, we've talked about it and it's clear on the record that if there is no provision that GAAP applies, but where did you get that if there's a conflict? Just point it out, that would be the easiest way to do it. A. The hierarchy, if you will, requires providers to file costs on the accrual basis of accounting in accordance with generally accepted accounting principles. If there's no rules, in absence of rules -- and I forget what the other terms were, we read it into the record before, against public policy, those kind of things -- or in my professional opinion, if there is a conflict within the rules where the provider can't follow two separate rules at the same time, they're in conflict, then [GAAP] rules what should be recorded and what should be reimbursed. * * * Q. [T]he company accrued a liability of $2 million for the cost reporting period of 2002-2003, is that correct? A. Yes. * * * Q. Do you have any documentation supporting claims paid, actually paid, in 2002-2003 beyond the mature care policy for which that $2 million reserve was set up? A. No. Q. So what did Medicaid pay for? A. Medicaid paid the cost of contingent liabilities that were incurred by the providers and were estimated at $1,750 per bed. Generally accepted accounting principles will adjust that going forward every cost reporting period. If that liability in total goes up or down, the differential under [GAAP] goes through the income statement, and expenses either go up or they go down. It's self-correcting, which is similar to what Medicare is doing, only they're doing it on a cash basis. Mr. Swindling explained the "hierarchy" by which allowable costs are determined. The highest governing law is the Federal statutory law, Title XIX of the Social Security Act, 42 U.S.C. Subsection. 1396-1396v. Below the statute come the federal regulations for implementing Title XIX, 42 C.F.R. parts 400-426. Then follow in order Florida statutory law, the relevant Florida Administrative Code provisions, the Plan, the Manual, and, at the bottom of the hierarchy, GAAP. Mr. Swindling testified that in reality, a cost report is not prepared from the top of the hierarchy down; rather, GAAP is the starting point for the preparation of any cost report. The statutes, rules, the Plan and the Manual are then consulted to exclude specific cost items otherwise allowable under GAAP. In the absence of an applicable rule, or in a situation in which there is a conflict between rules in the hierarchy such that the provider is unable to comply with both rules, the provider should fall back on GAAP principles as to recording of costs and reimbursement. John A. Owens, currently a consultant in health care finance specializing in Medicaid, worked for AHCA for several years up to 2002, in positions including administrator of the audit services section and bureau chief of the Office of Medicaid Program Analysis. Mr. Owens is a CPA and expert in health care accounting and Medicare/Medicaid reimbursement. Mr. Owens agreed with Mr. Swindling that AHCA's disallowance of the accrued costs for GL/PL liability was improper. Mr. Owens noted that Section 2160 of the Manual requires providers to purchase commercial insurance. If commercial insurance is unavailable, then the Manual gives the provider two choices: self-insure, or establish a captive program. Mr. Owens testified that insurers were fleeing the state during the period in question, and providers were operating without insurance coverage. Based on the state of the market, Petitioners' only options would have been to self-insure or establish a captive. As to self-insurance, Petitioners' problem was that they had taken over the leases on their facilities from a bankrupt predecessor, Integrated Health Services ("IHS"). Petitioners were not in privity with their predecessor. Petitioners had no access to the facilities' loss histories, without which they could not perform an actuarial study or engage a fiduciary to set up a self-insurance plan.11 Similarly, setting up a captive would require finding an administrator and understanding the risk exposure. Mr. Owens testified that a provider would not be allowed to set up a captive without determining actuarial soundness, which was not possible at the time Petitioners took over the 14 IHS facilities. Thus, Petitioners were simply unable to meet the standards established by the Manual. The options provided by the Manual did not contemplate the unique market situation existing in Florida during the audit period, and certainly did not contemplate that situation compounded by the problems faced by a new provider taking over 14 nursing homes from a bankrupt predecessor. Mr. Owens agreed with Mr. Swindling that, under these circumstances, where the requirements of the Manual could not be met, Petitioners were entitled to seek relief under GAAP, FAS No. 5 in particular. In situations where a loss is probable and can be measured, then an accounting entry may be performed to accrue and report that cost. Mr. Owens concluded that Petitioners' accrual was an allowable cost for Medicaid purposes, and explained his rationale as follows: My opinion is, in essence, that since they could not meet -- technically, they just could not meet those requirements laid out by [the Manual], they had to look somewhere to determine some rational basis for developing a cost to put into the cost report, because if they had chosen to do nothing and just moved forward, those rates would be set and there would be nothing in their base year which then establishes their target moving forward. So by at least looking at a rational methodology to accrue the cost, they were able to build something into their base year and have it worked into their target system as they move forward. Steve Diaczyk, an audit evaluation and review analyst for AHCA, testified for the agency as an expert in accounting, auditing, and Medicaid policy. Mr. Diaczyk was the AHCA auditor who reviewed the work of Smiley & Smiley for compliance with Medicaid rules and regulations, and to verify the accuracy of the independent CPA's determinations. Mr. Diaczyk agreed with Mr. Swindling's description of the "hierarchy" by which allowable costs are determined. Mr. Diaczyk affirmed that Petitioners employed GAAP rather than Medicaid regulations in preparing their cost reports. Mr. Diaczyk testified regarding the Notes to Petitioners' audited financial statements, set forth at Findings of Fact 22-24, supra, which left AHCA's auditors with the understanding that Petitioners were self-insuring. Mr. Diaczyk pointed out that Section 2162.7 of the Manual requires a self- insurer to contract with an independent fiduciary to maintain a self-insurance fund, and that the fund must contain monies sufficient to cover anticipated losses. The fiduciary takes title to the funds, the amount of which is determined actuarially. Mr. Diaczyk explained that, in reimbursing a provider for self-insurance, Medicaid wants to make sure that the provider has actually put money into the fund, and has not just set up a fund on its books and called it "self-insurance" for reimbursement purposes. AHCA's position is that it would be a windfall for a provider to obtain reimbursement for an accrued liability when it has not actually set the money aside and funded the risk. Medicaid wants the risk transferred off of the provider's books and on to the self-insurance fund. Mr. Diaczyk testified as to the differing objectives of Medicaid and GAAP. Medicaid is concerned with reimbursing costs, and is therefore especially sensitive regarding the overstatement of costs. Medicaid wants to reimburse a provider for only those costs that have actually been paid. GAAP, on the other hand, is about report presentation for a business entity and is concerned chiefly with avoiding the understatement of expenses and overstatement of revenue. Under GAAP, an entity may accrue a cost and not pay it for years. In the case of a contingent liability, the entity may book the cost and never actually pay it. Mr. Diaczyk described the self-insurance and liquidation provisions of 42 C.F.R. Section 413.100, "Special treatment of certain accrued costs." The federal rule essentially allows accrued costs to be claimed for reimbursement, but only if they are "liquidated timely." Subsection (c)(2)(viii) of the rule provides that accrued liability related to contributions to a self-insurance program must be liquidated within 75 days after the close of the cost reporting period. To obtain reimbursement, Petitioners would have had to liquidate their accrued liability for GL/PL insurance within 75 days of the end of the audit period. Mr. Diaczyk also noted that, even if the 75-day requirement were not applicable, the general requirement of Section 2305.2 of the Manual would apply. Section 2305.2 requires that all short-term liabilities must be liquidated within one year after the end of the cost reporting period in which the liability is incurred, with some exceptions not applicable in this case. Petitioners' accrued liability for general and professional liability insurance was not funded or liquidated for more than one year after the cost reporting period. It was a contingent liability that might never be paid. Therefore, Mr. Diaczyk stated, reimbursement was not in keeping with Medicaid's goal to reimburse providers for actual paid costs, not for potential costs that may never be paid. Petitioners responded that their accrued liabilities constituted non-current liabilities, items that under normal circumstances will not be liquidated within one year. Mr. Parnell testified that there is great variation in how long it takes for a general and professional liability claim against a nursing home to mature to the point of payment to the claimant. He testified that a "short" timeline would be from two to four years, and that some claims may take from eight to eleven years to mature. From these facts, Petitioners urge that 42 C.F.R. Section 413.100 and Section 2305.2 of the Manual are inapplicable to their situation. As to Section 2305.2 in particular, Petitioners point to Section 2305.A, the general liquidation of liabilities provision to which Section 2305.2 provides the exceptions discussed above. The last sentence of Section 2305.A provides that, where the liability is not liquidated within one year, or does not qualify under the exceptions set forth in Sections 2305.1 and 2305.2, then "the cost incurred for the related goods and services is not allowable in the cost reporting period when the liability is incurred, but is allowable in the cost reporting period when the liquidation of the liability occurs." (Emphasis added.) Petitioners argue that the underscored language supports the Medicare/Medicaid distinction urged by Mr. Swindling. In its usual Medicare retroactive reimbursement context, Section 2305.2 would operate merely to postpone reimbursement until the cost period in which the liability is liquidated. Applied to this Medicaid prospective reimbursement situation, Section 2305.2 would unfairly deny Petitioners any reimbursement at all by excluding the liability from the base rate. Mr. Diaczyk explained that, where the Medicaid rules address a category of costs, the allowable costs in a provider's cost report are limited to those defined as allowable by the applicable rules. He stated that if there is a policy in the Manual that addresses an item of cost, the provider must use the Manual provision; the provider cannot use GAAP to determine that cost item. In this case, Mr. Diaczyk agreed with Ms. Smiley as to the applicable rules and the disallowance of Petitioners' contingent liability costs. According to Mr. Diaczyk, GAAP may be used only if no provisions farther up the chain of the "hierarchy" are applicable. In this case, the Medicaid rules specifically addressed the categories of cost in question, meaning that GAAP did not apply. Under cross-examination, Mr. Diaczyk testified that the accrual made by Petitioners in their cost reports would be considered actual costs under GAAP, "[a]ssuming that they had an actuarial study done to come up with the $1.7 million that they accrued." Mr. Diaczyk acknowledged that AICPA Audit and Accounting Guide for Health Care Organizations, Section 8.05, does not limit the provider to an actuarial study in estimating losses from asserted and unasserted claims. See Finding of Fact 49, supra, for text of Section 8.05. Mr. Diaczyk pointed out that the problem in this case was that Petitioners gave AHCA no documentation to support their estimate of the accrual, despite the auditor's request that Petitioners provide documentation to support their costs. Mr. Diaczyk's testimony raised a parallel issue to Mr. Swindling's concern that Medicaid's prospective targeting system permanently excludes any item of cost not included in the base rate. Mr. Swindling solved the apparent contradiction in employing Medicare rules in the Medicaid scenario by applying GAAP principles. Responding to the criticism that GAAP could provide a windfall to Petitioners by reimbursing them for accrued costs that might never actually result in payment, Mr. Swindling responded that GAAP principles would adjust the cost for contingent liabilities going forward, "truing up" the financial statements in subsequent reporting periods. This truing up process would have the added advantage of obviating the agency's requirement for firm documentation of the initial accrual. Mr. Swindling's "truing up" scenario under GAAP would undoubtedly correct Petitioners' financial statements. However, Mr. Swindling did not explain how the truing up of the financial statements would translate into a correction of Petitioners' reimbursement rate.12 If costs excluded from the base rate cannot be added to future rate adjustments, then costs incorrectly included in the base rate would also presumably remain in the facility's rate going forward.13 Thus, Mr. Swindling's point regarding the self-correcting nature of the GAAP reporting procedures did not really respond to AHCA's concerns about Petitioners' receiving a windfall in their base rate by including the accrual for contingent liabilities. On April 19, 2005, Petitioners entered into a captive insurance program. Petitioners' captive is a claims-made GL/PL policy with limits of $1 million per occurrence and $3 million in the aggregate. Under the terms of the policy, "claims-made" refers to a claim made by Petitioners to the insurance company, not a claim made by a nursing home resident alleging damages. The effective date of the policy is from April 21, 2005, through April 21, 2006, with a retroactive feature that covers any claims for incidents back to June 29, 2002, a date that corresponds to Petitioners' first day of operation and participation in the Medicaid program. The Petitioners' paid $3,376,906 for this policy on April 22, 2005. Mr. Parnell testified that April 2005 was the earliest time that the 14 Palm Gardens facilities could have established this form of insurance program. In summary, the evidence presented at the hearing regarding the contingent liabilities established that Petitioners took over the 14 Palm Gardens facilities after the bankruptcy of the previous owner. Petitioners were faced with the virtual certainty of substantial GL/PL expenses in operating the facilities, and also faced with a Florida nursing home environment market in which commercial professional liability insurance was virtually unavailable. Lacking loss history information from their bankrupt predecessor, Petitioners were unable to self-insure or establish a captive program until 2005. Petitioners understood that if they did not include their GL/PL expenses in their initial cost report, those expenses would be excluded from the base rate and could never be recovered. Petitioners' leases for the facilities required them to fund a self-insurance reserve at a per bed minimum amount of $1,750. Based on the AON studies and the general state of the industry at the time, Petitioners' accountant concluded that, under GAAP principles, $1,750 per bed was a reasonable, conservative estimate of Petitioners' GL/PL loss contingency exposure for the audit period.14 Based on all the evidence, it is found that Petitioners' cost estimate was reasonable and should be accepted by the agency. Petitioners included their GL/PL loss contingency expenses in their initial Medicaid cost report, placing those expenses under a heading indicating the purchase of insurance from a third party. The notes to Petitioners' audited financial statements stated that the facilities were "essentially self- insured." These factors led AHCA to request documentation of Petitioners' self-insurance. Petitioners conceded that they were not self-insured and carried no liability insurance aside from the Mature Care policies. The parties had little dispute as to the facts summarized above. The parties also agreed as to the applicability of the "hierarchy" by which allowable costs are determined. Their disagreement rests solely on the manner in which the principles of the hierarchy should be applied to the unique situation presented by Petitioners in these cases.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that AHCA enter a final order that allows Petitioners' accrual of expenses for contingent liability under the category of general and professional liability ("GL/PL") insurance, and that disallows the Mature Care policy premium amounts in excess of the policy limits, prorated for a nine- month period. DONE AND ENTERED this 24th day of October, 2008, in Tallahassee, Leon County, Florida. S LAWRENCE P. STEVENSON Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 24th day of October, 2008.
Findings Of Fact At all times pertinent to the issues herein, the Petitioner, Department of Insurance, was the state agency responsible for the licensure of insurance agents and the regulation of the insurance business in Florida. Respondent, Richard M. Rinker, was licensed by the Petitioner as a health insurance agent engaged in the business of soliciting, selling and servicing health insurance policies for National States Insurance Company. Levon H. and Joan D. Sprague, husband and wife, moved to Florida from New York in August, 1991. Prior to moving to Florida, the Spragues operated a restaurant in New York and purchased health insurance from Blue Cross/Blue Shield for themselves and some of their employees. They also owned a H.I.P. policy which was similar to a health maintenance organization, but both that coverage and the Blue Cross/Blue Shield coverage were dropped when they moved to Florida. Because both Mr. and Mrs. Sprague were getting older, and because both had indications of possible future health problems based on experience and family history, upon the recommendation of Mrs. Sprague's father, who had purchased coverage from Respondent and was satisfied with the service received, they contacted Respondent and met with him about purchasing health insurance. The first meeting was on January 6, 1992. At that time, the Sprague's made Respondent aware of the fact that they had no health insurance coverage at that time and that they wanted to purchase coverage which would give them 100 percent reimbursement of all bills for medical care rendered. After some discussion, they agreed to accept less coverage for doctors' bills and other professional services, but were quite adamant in reiterating they wanted a policy that would cover 100 percent of the cost of hospitalization. They emphasized this because of Mr. Sprague's family's history of heart problems and they wanted to be sure the hospital expense would be covered in full. They felt the doctors could wait a while for payment of the full amount of their bills. During the course of his presentation, Respondent utilized a document called a National States Limited Medical-Surgical Hospital Confinement Plan which purportedly outlined the specifics of policy coverage. Under that portion entitled "Specific Benefits", the form read, "This policy pays percent of usual and customary expenses of the following type:". Under the blank space, in smaller type, were the numbers "10, 20, 30, 40". In the blank area, Respondent, by hand, inserted 80 percent. Above, and to the right of that insertion, he also placed the numbers, "100 percent" and "40 percent." Respondent explains this as being his attempt to provide answers to questions asked of him by Mrs. Sprague. He noted that his company does not offer a major medical policy such as desired by the Spragues, and that the only way he could provide coverage close to that which they wanted was to combine policies. Using a yellow highlighter, he also highlighted the words, "Doctor's charges", "doctor's office", "clinic", "hospital", "home", and "surgical or medical center." He also highlighted the terms "annual mammography screening" because Mrs. Sprague had specifically inquired about coverage of that procedure. On that visit, Respondent sold the Spragues two policies each. These were "MSH-1" and "MSH-2" policies which, the Spragues recall, Respondent indicated would provide the total coverage they wanted. Initially, the premium was to be $3,600.00 for the year, but when the Spragues indicated they could not afford that much, after calling his office, Respondent was able to offer them 6 months coverage for one half the price. They were satisfied with this and accepted the policies. Mr. Rinker received as his commission 45 percent of the premium paid in by the Spragues for the first year of the policy. When he departed the Spragues' home, he left with them the policy outline he utilized in his presentation, a large manila envelope containing information regarding his office hours and phone number, and a MSP form required by law. The coverage was not heavily used at first. When, during the first six month period, claims were initially denied because of the waiting period, the Spragues accepted that. After the expiration of the waiting period, all claims submitted for doctors' visits and mammography were covered to at least 80 percent of the amount expected by the Spragues. This was, however, because of the combined benefits paid by the two policies. Neither policy, alone, paid 100 percent percent of the claim. The Spragues were satisfied with this because it was not hospitalization. Later on, however, it became apparent that Mr. Sprague would have to enter the hospital for coronary bypass surgery, and he was admitted on an emergency basis. Before the surgery was done, however, the Spragues wanted to be sure the hospital bills would be paid in full, and they had their daughter- in-law, who had extensive experience in the insurance business prior to that time, to examine the policies. Her review of the policies generated some questions in her mind as to whether they provided 100 percent coverage of all hospital costs. To satisfy herself and her in-laws, utilizing the telephone number for Respondent on the materials left by him with the Spragues, she contacted him and asked, specifically, whether the policies he had sold to the Spragues, provided the 100 percent coverage they desired. His answer was somewhat evasive and non- responsive to her inquiry. He said, "Don't worry. She'll [Ms. Sprague] be able to sleep at night. She has a good policy." This did not satisfy either Ms. Sprague or her mother-in-law, and so she called Respondent again. During this second conversation he admitted that for at least a part of the cost, there was a 40 percent coinsurance provision. Respondent claims that during these calls, Ms. Sprague did not tell him that her father-in-law was to have surgery but only told him about tests. The tests were covered and the bills therefor paid by National States. By the time of these calls, however, Mr. Sprague was already in the hospital and facing the surgery the following morning. There was little that could be done. Mr. Sprague wanted to cancel the surgery but his wife would not allow this and the operation was accomplished. The hospital bills received by the Spragues amounted to approximately $140,000. Of this, the insurance company paid approximately $18,000. Ultimately, the Spragues and the hospital were able to reach an agreement for settlement of the obligation for $40,000. In order to satisfy this, Mr. Sprague was required to liquidate all his investments. He still owes the doctors a substantial sum but is making periodic payments to liquidate those obligations. The policies which Respondent sold to the Spragues were limited medical and surgical expense policies which pay only a limited percentage of incurred medical expenses over a limited period of time. Neither policy pays 100 percent of any medical or surgical expense. Respondent did not clearly communicate this fact to the Spragues. They suffered from the misconception that the policies sold to them by the Respondent paid 100 percent coverage for hospital expense, 80 percent for doctor fees, and 40 percent for medication. Petitioner presented no evidence that what Respondent did was below the standards accepted of sales agents within the health insurance industry. On the other hand, James Quinn, an insurance agent since 1975, who has taught life and health insurance and the legal responsibility of agents in the health insurance area with the approval of the Department since 1985, testified on behalf of Respondent. Mr. Quinn noted that there are three types of medical policies in use, including basic medical expense, major medical, and comprehensive major medical. The first of these, basic medical expense, permits liberal underwriting and pays policy limits. In Mr. Quinn's opinion, based on the age and preexisting conditions that the Sprague's have, major medical coverage, like they wanted, would cost between seven and ten thousand dollars annually, excluding deductibles. Health insurance coverage outlines, such as used by Respondent in his presentation to the Spragues are, according to Mr. Quinn, reasonably self-explanatory and are left with the insured either when the policy is applied for or is delivered. In the former case, the client is able to read the outline and cancel the policy before delivery, if he so desires. In the latter case, the insured has a set number of days to read the policy after delivery and cancel if he so desires. These outlines do not substitute for the policy, however, and generally, the agent prefers to deliver the policy personally so he can go over it again with the insured. According to Mr. Quinn, it is difficult to explain coverage to prospective insureds because of their unfamiliarity with the terminology and the available benefits. He concluded that the action of the Respondent, in issue here, whereby he used the coverage outline to explain the coverages to the Spragues, was consistent with proper agent conduct and was within industry standards. He also concluded that based on what Respondent had available to sell to the Spragues, he sold them the best package he could, at the time.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is, therefore: RECOMMENDED that a Final Order be issued in this matter finding Respondent, Richard Michael Rinker, guilty of a violation of Sections 626.611(5), (7), (9), and (13); 626.621(2) and (6); 626.9521, and 626.9541(1)(a)(1), (1)(e)(1), and (1)(k)(1), Florida statutes, and suspending his license as a health insurance agent for nine months. RECOMMENDED this 13th day of October, 1994, in Tallahassee, Florida. ARNOLD H. POLLOCK, 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 13th day of October, 1994. APPENDIX TO RECOMMENDED ORDER IN CASE NO. 94-0089 The following constitutes my specific rulings pursuant to Section 120.59(2), Florida Statutes, on all of the Proposed Findings of Fact submitted by the parties to this case. FOR THE PETITIONER: & 2. Accepted and incorporated herein. 3. & 4. Accepted and incorporated herein. & 6. Accepted and incorporated herein. Accepted and incorporated herein. Accepted and incorporated herein. & 10. Accepted and incorporated herein. FOR THE RESPONDENT: Accepted and incorporated herein. Accepted as to finding Mr. Quinn is an expert regarding insurance standards and business practices, but rejected as insinuating those opinions are binding on the Hearing Officer. Rejected notwithstanding the opinions of Mr. Quinn. Accepted, as there is no evidence to the contrary. Rejected as contra to the weight of the evidence. First sentence rejected as contra to the evidence. Second sentence accepted as to the furnishing, but the quality of the information was less than clear. Balance accepted. & 8. Rejected. COPIES FURNISHED: Daniel T. Gross, Esquire Department of Insurance and Treasurer Division of Legal Services 612 Larson Building Tallahassee, Florida 32399-0333 Thomas F. Woods, Esquire Gatlin, Woods, Carlson & Cowdery 1709-D Mahan Drive Tallahassee, Florida 32308 Tom Gallagher State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, Florida 32399-0300 Bill O'Neill General Counsel 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
The Issue The issue is whether respondent's license as a health insurance agent should be disciplined for the reasons stated in the administrative complaint.
Findings Of Fact Based upon all of the evidence, the following findings of fact are determined: At all times relevant hereto, respondent, Michael Halloran, was licensed and eligible for licensure as a health insurance agent by petitioner, Department of Insurance and Treasurer (Department). When the events herein occurred, respondent was licensed to solicit health insurance on behalf of National States Life Insurance Company (NSLIC) and Transport Life Insurance Company (TLIC). He was also under contract with Diversified Health Services of St. Petersburg, Florida until that firm terminated his agency appointment on May 5, 1989. This proceeding involves the sale by respondent of various health insurance policies to four customers in January and February 1989. In 1987, Raymond H. Koester, a Largo resident, purchased from respondent a supplemental Medicare policy for both him and his wife. Their first policy was issued by American Integrity. A year later, respondent persuaded the Koesters to replace that policy with one issued by Garden State Insurance Company on the ground the latter policy represented an "improvement" over their existing policy. On January 10, 1989 respondent met with the Koesters for the purpose of selling them new health insurance coverage. During their meeting, respondent advised the Koesters that a new NSLIC policy would provide unlimited custodial and home health care, a type of coverage desired by the Koesters. Relying upon respondent's representation, the Koesters agreed to purchase two new policies. They filled out an application and paid Halloran $2,628 which was the premium for the first year. When the application was completed, respondent answered "no" to the question of whether the new policies were intended to replace existing coverage. This was a false representation. In June 1989 the Koesters learned that they had a problem with their new policies. This advice was conveyed to them by petitioner's investigator who advised them that the policies sold by Halloran loran did not provide any custodial or home health care benefits. Had the Koesters known this, they would not have purchased the insurance. On January 18, 1989 respondent visited Grace Miller, an elderly resident of Venice, Florida, for the purpose of selling her a health insurance policy. At that time Miller had an existing policy in force since 1983 which provided supplemental Medicare coverage. Respondent advised Miller that her existing coverage was inadequate and that more coverage was needed. More specifically, Halloran represented that a new NSLIC policy would supplement her basic Medicare coverage and increase her overall health insurance coverage. Based on that representation, Miller agreed to purchase a replacement policy issued by NSLIC. As it turned out, the policy sold to Miller was of little or no value to a Medicare recipient, such as Miller, and simply filled in the gaps on a major medical policy. Had Miller known this to begin with, she would not have purchased the policy. Respondent also persuaded Miller to purchase a long-term care policy from TLIC. She allowed respondent to fill out the application using information from her old policy. Without telling Miller, respondent misrepresented on the application her date of birth as December 2, 1921 when in fact she was born on December 2, 1911, or ten years earlier. By doing this, Halloran was able to reduce Miller's premium from $1,159.92 to $441.72. Had Miller known that she was responsible for paying a much higher premium, she would not have purchased the policy. On February 25, 1989 respondent accepted another check from Miller in the amount of $773.00 for an unknown reason. At about the same time, respondent submitted to NSLIC an application for a medical-surgical expense policy dated the same date purportedly executed by Miller In fact, Miller had not executed the policy and her signature was forged. NSLIC declined to issue a new policy to Miller since she already had a policy of that type in effect. On January 20, 1989 respondent visited Gertrude Simms, an elderly resident of Fort Myers. Simms desired to purchase a hospital expense insurance policy with a provision for dental insurance coverage. Simms desired such coverage because she had a medical condition that required her to have her teeth cleaned frequently to avoid an infection. Respondent was aware of this condition. Nonetheless, Halloran prepared an application with NSLIC for a limited medical-surgical expense insurance policy which did not provide any dental coverage. Respondent accepted a $1,100 check from Simms which he represented to her was the first year's premium. In fact, the first year's premium was only $506. Although respondent was supposed to return to Simms' home to explain the policy provisions, he never returned. At about this same time, TLIC received an application on behalf of Simms for a long-term care insurance policy bearing the signature of respondent as agent. However, Simms had no knowledge of the application and did not wish to purchase such a policy. The information contained in the TLIC application misrepresented Simms' age so that the premium was lower than it should have been. Although TLIC issued a policy and sent it to respondent, Halloran never delivered it to Simms. On February 1, 1989 respondent visited Velma Sonderman, who resided in Venice, Florida, for the purpose of selling her a health insurance policy. She had become acquainted with respondent through Grace Miller, who is referred to in finding of fact 4. Sonderman was then covered by a supplemental medicare insurance policy issued by United American Medicare. According to Sonderman, respondent gave a "snow job" and represented he could sell her better coverage through NSLIC. Sonderman agreed to purchase a new policy for supplemental medicare coverage to replace her existing policy and signed an application filled in by respondent. However, the application submitted by respondent was for a NSLIC limited benefit health insurance policy rather than the medicare supplement insurance policy Sonderman believed she was purchasing. Respondent also convinced Sonderman to purchase a long-term nursing home care policy issued by TLIC. When filling out the application on her behalf, but without telling Sonderman, respondent misrepresented Sonderman's birth date as July 11, 1915 instead of the correct date of July 11, 1911. By doing this, Sonderman's premium was reduced from $999.36 to $599.04 per year.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that respondent's license as a health insurance agent be REVOKED. DONE and ENTERED this 4 day of April, 1990, in Tallahassee, Florida. DONALD ALEXANDER 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 4 day of April, 1990. APPENDIX Petitioner: 1-3. Substantially used in finding of fact 1. 4-17. Substantially used in findings of fact 4, 5 and 6. 18-29. Substantially used in findings of fact 9 and 10. 30-33. Substantially used in findings of fact 2 and 3. 34-45. Substantially used in findings of fact 7 and 8. 46. Substantially adopted in finding of fact l. Copies furnished to: Honorable Tom Gallagher Insurance Commissioner Plaza Level, The Capitol Tallahassee, FL 32399-0300 James A. Bossart, Jr., Esquire 412 Larson Building Tallahassee, FL 32399-0300 Mr. Michael Halloran 2519 McMullen Booth Road Clearwater, FL 34621 Donald A. Dowdell, Esquire Department of Insurance Plaza Level, The Capitol Tallahassee, FL 32399-0300
The Issue An administrative complaint dated April 4, 1994, alleges in a single count that Respondent, Edward Aloysius Garvey, violated various provisions of Chapter 626, F.S. by failing to reveal a proposed insured's pre-existing medical condition on an application for group health insurance. The issue in this proceeding is whether the violations occurred and if so, what license discipline is appropriate.
Findings Of Fact At all times relevant to these proceedings, Respondent, Edward Aloysius Garvey, was licensed as a life insurance agent, a life and health insurance agent, health insurance agent and dental care contract salesman. On or about May 2, 1993, Mr. Garvey wrote an insurance application for group health insurance coverage for Patrica Foutt, of Palm Bay, Florida. Ms. Foutt was a new employee of Florida Diagnostic Imagery. The coverage was to have been provided by Fidelity Security Life Insurance Company. Because Florida Diagnostic Imagery changed group insurers several times, May 2, 1993, was one of several visits Mr. Garvey made to assist with enrollment of the employees. The enrollment and completion of applications took place in a small kitchen-like break room. Employees were in and out of the room. The enrollment forms were mostly completed by Mr. Garvey. He asked the questions and filled in the blanks with responses given by the employees. There is a section of the application form involving a series of medical conditions. The form requires a yes or no check mark, and an explanation for any "yes" response. One of the medical conditions in the series is disease or disorder of the heart or circulatory system; there also is a question of whether the applicant received any treatment, surgery, consultation or advice (including prescriptions) for any conditions within the last 10 years. Patrica Foutt's application form reflects a "yes" answer only for the latter question. On the space provided for explanation is this language: "1988 - Last check-up. Dr. Thomas Rose [and his address]. Excellent health-no problems". Mrs. Foutt signed the application beneath this language: I represent that the above statement and answers are true and complete. Also, I under- stand that no Agent, Broker or Representative has authority to bind coverage and no insurance will become effective unless approved in writing by the Company. I understand that no agent, broker or representative is allowed to permit me to answer any question inaccurately or untruthfully and I represent that such did not occur. I further understand that any material omission or medical information or material misrepresentation can result in rescission of coverage. I understand that any condition which was diagnosed or treated within the twelve (12) month period to the effective date of insurance will not be covered until the insurance has been in effect for twenty-four (24) months. Ms. Foutt has and, at the time the application was completed, had mitral valve prolapse. She claims she told Mr. Garvey that she had seen a cardiologist for this condition, but that Mr. Garvey said it was not significant enough to put on the form. Mr. Garvey denies that he was told about the condition. After the application was taken, the company issued a policy to Ms. Foutt. She later went to see Dr. Rose again with some chest pain and a little palpitations. After she filed a claim on her policy, the policy was rescinded. Sondra Henry was also employed at Florida Diagnostic Imagery in 1991. She was in the small room filling out her own application when she overheard Mr. Garvey's and Ms. Foutt's exchanges. She "believe[s] Ms. Foutt told Mr. Garvey that she suffered from micro valve prolapse and asked if it mattered". According to Ms. Henry, he replied "no, because it [was] a benign condition". (transcript pp 22-23) No evidence whatsoever was presented on micro valve prolapse, also referred to as "MVP". Nor was any competent evidence presented on why Ms. Foutt's claim was denied and her policy cancelled. Both Ms. Foutt and Mr. Garvey were earnest, credible witnesses. Ms. Foutt claims she told Mr. Garvey about her micro valve prolapse; he does not remember that she told him and feels that if she had, he would have either noted it or checked with the underwriter. At the hearing, Ms. Foutt insisted that she gave correct responses to all of the questions on the application, and that she is in "excellent health" as noted on the form and has "no problems". (transcript p. 14) It is impossible to find that one person or the other is untruthful; it is more likely that there was a misunderstanding by one person or another. Without evidence of the nature and seriousness of micro valve prolapse, it is impossible to weigh Ms. Foutt's claim of "no problems" or to assess how that response should have affected Mr. Garvey's completion of her application. No evidence was presented of prior misdeeds by Mr. Garvey. Two business owners for whose employees he has acted as agent for eight to ten years have never had any problems with Mr. Garvey's insurance representation.
Recommendation Based on the foregoing, it is hereby, RECOMMENDED: That the Department of Insurance enter a final order dismissing the complaint against Respondent, Edward Aloysius Garvey. DONE AND RECOMMENDED this 13th day of January, 1995, in Tallahassee, Leon County, Florida. MARY CLARK 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 13th day of January, 1995. APPENDIX The following constitute my specific rulings on the findings of fact proposed by the parties: Petitioner's Proposed Findings Adopted in paragraph 1. Adopted in paragraph 2. Rejected as unsupported by clear and convincing evidence. Adopted in substance in paragraph 9; however, Ms. Henry's testimony was equivocal as she says she "believes" she overheard the question and response. Rejected as unsupported by competent evidence. Rejected as argument and unnecessary; while the first sentence is accurate, it is immaterial here since Petitioner failed to prove that the misrepresentation occurred. Respondent's Proposed Findings Respondent's proposed findings are substantially adopted here, except for paragraphs 5 through 7. While it was not clearly established that Ms. Foutt did not properly inform Mr. Garvey, it was not his burden to prove that she did not. If she did tell him of her condition, there was likely misunderstanding. COPIES FURNISHED: Bill Nelson State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, FL 32399-0300 Dan Sumner, Esquire Acting General Counsel Department of Insurance The Capitol, PL 11 Tallahassee, FL 32399-0300 Lisa S. Santucci, Esquire Dept. of Insurance & Treasurer 612 Larson Building Tallahassee, FL 32399-0333 J. C. Murphy, Esquire 1901 S. Harbor City Blvd., Ste. 805 Melbourne, FL 32901
The Issue The issue is whether Respondent complied with Sections and 440.38, Florida Statutes, with regard to workers' compensation insurance for his subcontractors, and if not, the appropriate amount of penalty that should be assessed.
Findings Of Fact Hernandez, Inc., is a contractor based in the Jacksonville, Florida area, and is in the business of installing dry wall, among other construction related activities. The Department of Financial Services is the state agency responsible for enforcing the Workers' Compensation Law. This duty is delegated to the Division of Workers' Compensation. On February 5, 2004, Hernandez, Inc., was engaged in installing drywall in the Bennett Federal Building in Jacksonville, Florida. Hernandez, Inc., was a subcontractor for Skanska, Inc., who was the general contractor for the building. Hernandez, Inc., was accomplishing the installation of drywall by using two subcontractors, GIO & Sons (GIO), of Norfolk, Virginia, and U&M Contractors, Inc., (U&M), of Charlotte, North Carolina. Hernandez, Inc., was also using its own personnel, who were leased from Matrix, Inc., an employee leasing company. Prior to contracting with GIO and U&M, Hernandez, Inc., asked for and received ACORD certificates of insurance, which on their face indicated that the subcontractors had both liability coverage and workers' compensation coverage. It is the practice of Hernandez, Inc., to ensure that certificates of insurance are provided by subcontractors and the office staff of Hernandez, Inc., tracks the certificates so that they are kept current. Since the beginning of 2001, Hernandez, Inc., has received approximately 310 certificates of insurance from subcontractors. These certificates listed Hernandez, Inc., as the certificate holder. Though most of the producers and insureds on these certificates are from Florida, a substantial number are from other states. Hernandez, Inc., relied on the certificates as evidence that the subcontractor's workers were covered by workers' compensation insurance. Hernandez, Inc., has relied on certificates of insurance for more than twenty years and, with the exception of this case, has never known an instance where the underlying policy was invalid. On February 5, 2004, Katina Johnson, an investigator with the Division, made a routine visit to the Bennett Federal Building with another investigator. She observed personnel from Hernandez, Inc., and its subcontractors, installing dry wall. On February 5, 2004, Ms. Johnson determined that Hernandez, Inc., also had a contract to install dry wall as a subcontractor participating in the construction of the Mayport BEQ. L. C. Gaskins Company was the general contractor engaged in the construction of the Mayport BEQ. U&M worked at both the Bennett Federal Building site and the Mayport BEQ site as a subcontractor of Hernandez, Inc. Ms. Johnson issued a Stop Work Order on February 26, 2004, to Hernandez, Inc., GIO, and U&M. By the Stop Work Order, Hernandez, Inc., was charged with failure to ensure that workers' compensation meeting the requirements of Chapter 440, Florida Statutes, and the Florida Insurance Code, was in place for GIO and U&M. The Stop Work Order indicated that the penalty amount assessed against Respondent would be subject to amendment based on further information provided by Hernandez, Inc., including the provision of business records. An Amended Order of Penalty Assessment dated March 19, 2004, was served on Hernandez, Inc., which referenced the Stop Work Order of February 26, 2004. The Amended Order of Penalty Assessment was in the amount of $157,794.49. The Amended Order of Penalty Assessment reached back to September 29, 2003. An Amended Order of Penalty Assessment dated March 22, 2004, was served on GIO. This Amended Order of Penalty Assessment was in the amount of $107,885.71. An Amended Order of Penalty Assessment with a March 2004 date (the day is obscured on the document by a "filed" stamp), was served on U&M. This Amended Order of Penalty Assessment was in the amount of $51,779.50. The sum of these numbers is $159,665.21. However, the parties agreed at the hearing that the amount being sought by the Division was $157,794.49, which represented the total for GIO and U&M. Hernandez, Inc.'s, employees leased from Matrix were covered by workers' compensation insurance through a policy held by Matrix. The Matrix policy did not cover the employees of GIO and U&M. Although Skanska, Inc., and L. C. Gaskins Company had workers' compensation insurance in force, their policies did not cover the workers used by Hernandez, Inc., or the employees of GIO or U&M. GIO and U&M employees were considered by the Division to be "statutory employees" of Hernandez, Inc., for purposes of the Workers' Compensation Law. This meant, according to the Division, that Hernandez, Inc., was required to ensure that the employees of GIO and U&M would receive benefits under the Workers' Compensation Law if a qualifying event occurred, unless the subcontractors had workers' compensation insurance policies in force that satisfied the Division. GIO had a policy of workers' compensation insurance evidenced by an ACORD certificate of liability insurance for the period December 3, 2002, until December 3, 2003. The policy was produced by Salzberg Insurance Agency in Norfolk, Virginia. It listed Hernandez as the certificate holder. The policy was issued by Maryland Casualty Company, a subsidiary of the Zurich American Insurance Company. These companies are admitted carriers in Florida. The Classification of Operations page of this policy indicated class code 5022, masonry work. GIO employers were installing drywall during times pertinent. Rates for drywall installation are substantially higher than for masonry work. In the policy section titled "Other States Insurance," Florida is not mentioned. William D. Hager, an expert witness, reviewed the certificate of insurance and the policy supporting the certificate. Mr. Hager is a highly qualified expert in insurance and workers' compensation coverage. Among other qualifications, he is an attorney and a former member of the National Association of Insurance Commissioners by virtue of his position as Insurance Commissioner for the State of Iowa. He concluded that this policy did not conform to the requirements of Chapter 440 because the policy was Virginia based and did not apply Florida rates, rules, and class codes. Mr. Sapourn, testified as an expert witness. Mr. Sapourn has a degree from the University of Virginia in economics with high distinction and a juris doctorate from Georgetown. He is a certified insurance counselor and owned an insurance agency in the District of Columbia area. As an insurance agent he has issued tens of thousands certificates of insurance and written hundreds of workers' compensation policies. Mr. Sapourn, opined that this certificate represented workers' compensation coverage that complied with Chapter 440, Florida Statutes. Upon consideration of the testimony of the experts, and upon an examination of the documents, it is concluded that the policy represented by the certificate of insurance for the period December 3, 2002, to December 3, 2003, did not comply with the requirements of Chapter 440. Subsequently, someone forged an ACORD certificate of liability insurance, which indicated that it was produced by Salzberg Insurance Agency, and that indicated that GIO was covered from December 4, 2003, until December 4, 2004. The forged certificate was presented to Hernandez, Inc., upon the expiration of the policy addressed above. It was accepted by Hernandez, Inc., and considered to be a valid certificate. Both of the experts pointed out that with their practiced eye they could easily determine that the certificate was a forgery. However, there was no evidence that Mr. Hernandez, or his employees, had training in forgery detection. Accordingly, it was reasonable for them to accept the certificate as valid. U&M presented Hernandez, Inc., with an ACORD certificate which indicated insurance coverage from October 24, 2003, until October 24, 2004. The producer was Insur-A-Car Commercial Division of Charlotte, North Carolina. The insurer was The St. Paul, an admitted carrier in Florida. The insured was U &M. The certificate holder was Hernandez Enterprises, Inc. William D. Hager reviewed the certificate of insurance and the policy supporting the certificate. He noted that The St. Paul policy upon which the certificate was based did not apply in Florida because U&M was not working temporarily in Florida and because it included a policy endorsement that stated: "The policy does not cover work conducted at or from 3952 Atlantic BLVD #D-12 Jacksonville, FL 32207." U&M's mailing address in Jacksonville was 3952 Atlantic Boulevard, Suite D-12. The information page of the policy, at Part 3.A. states that Part One applies to North Carolina. Part 3.C., Other States Insurance states that Part 3 of the policy applies to the states listed, and then refers to the "residual market limited other states insurance." Mr. Hager testified that the policy did not indicate compliance with Chapter 440, because the policy is North Carolina based, applies only North Carolina rates, and does not provide Florida coverage. Mr. Sapourn, on the other hand, opined that the policy provided workers' compensation that complied with Chapter 440. Although it is possible that a worker who was injured during times pertinent may have received benefits, it is clear that the policy did not comply with the requirements of Chapter 440. The Division instituted a Stop Work Order against U&M and sought to impose penalties upon it for failure to comply with Chapter 440 for offenses committed at the exact times and places alleged in this case. U&M demanded a hearing and was provided one. In a Recommended Order entered April 7, 2005, an Administrative Law Judge recommended that the Division enter a final order affirming the Stop Work Order and assessing a penalty in the amount of $51,779.50. See Department of Financial Services, Division of Workers' Compensation vs. U and M Contractors, Inc., Case No. 04-3041 (DOAH April 7, 2005). The recommendation was adopted in toto by the Department of Financial Services on April 27, 2005. See In the Matter of: U and M Contractors, Inc., Case No. 75537-05 WC (DFS April 27, 2005). The evidence taken as a whole demonstrates that U&M did not have workers' compensation coverage in Florida that complied with the requirements of Chapter 440, during times pertinent. Mr. Sapourn testified that the theory behind ACORD certificates of insurance is that they provide a uniform document upon which business people may rely. This testimony is accepted as credible. In order to continue working on a project not addressed by the Stop Work Order, Hernandez, Inc., entered into and agreement with the Division which provided for partial payments of the penalty in the amount of $46,694.03. This payment was made with the understanding of both parties that payment was not an admission of liability.
Recommendation Based upon the Findings of Fact and Conclusions of Law, it is
The Issue The issue in this proceeding is the amount payable to the Agency for Health Care Administration (Respondent) to satisfy a Medicaid lien under section 409.910, Florida Statutes (2015).1/
Findings Of Fact Nakila Merriex is the natural mother and legal guardian of Nivea Merriex (Nivea). At the time of her birth on November 30, 2011, Nivea suffered a shoulder injury and damage to the brachial plexus nerve. Nivea underwent surgery and subsequent physical therapy to treat the deficit related to the shoulder injury and nerve damage. The Petitioner filed a lawsuit against parties involved in Nivea’s birth and recovered monetary damages through settlement of the lawsuit. The terms of the settlement are confidential. Nivea also required speech therapy to treat a disorder wholly unrelated to the shoulder damage and nerve injury. The physical therapy and the speech therapy were delivered by the same provider, Lampert’s Home Therapy. For reasons unknown, Lampert’s Home Therapy utilized the primary billing diagnosis code of “9534-Brachial Plexus Injury” for both the physical therapy and the speech therapy services in submitting the claims to Medicaid. In calculating the Medicaid lien, the Respondent included all the charges for services rendered by Lampert’s Home Therapy. The Medicaid lien at issue in this case is for $37,679.56. According to the billing records admitted into evidence at the hearing, $5,603.54 of the charges billed by Lampert’s Home Therapy and paid by Medicaid were solely attributable to speech therapy services. Nivea’s speech disorder was not the subject of litigation. The Petitioner has received no award of damages from a third party related to the speech disorder. At the commencement of the hearing, the Petitioner conceded responsibility for satisfying the amount of the Medicaid lien related to charges for physical therapy services provided to treat the shoulder injury and nerve damage. Deducting the charges incurred for speech therapy from the total Medicaid lien results in a remaining lien of $32,076.02.
The Issue At issue in this proceeding is whether the Respondent, Brevard Management, LLC, (Brevard Management) failed to abide by the coverage requirements of the Workers' Compensation Law, Chapter 440, Florida Statutes, by not obtaining workers' compensation insurance for its employees; and whether Petitioner properly assessed a penalty against Respondent pursuant to Section 440.107, Florida Statutes.
Findings Of Fact Based on the oral and documentary evidence adduced at the final hearing, and the entire record in this proceeding, the following findings of fact are made: The Department is the state agency responsible for enforcing the requirement of the Workers' Compensation Law that employers secure the payment of workers' compensation coverage for their employees and corporate officers. § 440.107, Fla. Stat. On July 31, 2008, Eugene Wyatt, an insurance analyst working for the Department, visited the River Palm Motel in Melbourne to investigate the workers' compensation insurance status of several contractors performing renovations on the property. The River Palm Motel is owned by Brevard Management, whose principal owner is Albert Segev. During his visit, Mr. Wyatt spoke to Michael Cole, the hotel's manager, regarding the workers' compensation coverage of the hotel itself. Mr. Cole told Mr. Wyatt that the hotel used Automatic Data Processing, Inc. (ADP), a third-party payroll services provider, to provide workers' compensation insurance coverage. Brevard Management began operating the River Palm Motel on June 18, 2008. On June 19, 2008, Brevard Management entered into an agreement with ADP for the provision of payroll services, including the filing of payroll taxes, using Easy Pay, ADP's proprietary payroll management service. On August 25, 2008, Mr. Wyatt received an anonymous referral alleging that the River Palm Motel was not carrying workers' compensation insurance for its employees. Later that day, Mr. Wyatt returned to the River Palm Motel, this time to investigate the workers' compensation status of the motel itself. Upon his arrival at the motel, Mr. Wyatt spoke with Mr. Cole, who disclosed that Brevard Management owned the motel. Mr. Wyatt conducted a search of the Division of Corporation's website and learned that Mr. Segev was the principal owner of Brevard Management. Mr. Cole provided Mr. Wyatt with invoices for the last payroll period for the River Palm Motel. The invoices indicated that the company had more than ten employees, which led Mr. Wyatt to conclude that the company was required to secure workers' compensation insurance. At his deposition, Mr. Cole confirmed that River Palm Motel had between ten and twelve employees on August 25, 2008. Mr. Cole believed that Brevard Management had secured workers' compensation insurance coverage through ADP. However, the payroll invoices that Mr. Cole provided to Mr. Wyatt showed no deductions for any insurance. Mr. Wyatt consulted the Department's Coverage and Compliance Automated System (CCAS) database, which lists the workers' compensation insurance policy information for each business as provided by the insurance companies, as well as any workers' compensation exemptions for corporate officers. CCAS indicated that Brevard Management had no workers' compensation insurance policy in place and no current, valid exemptions. Mr. Cole provided Mr. Wyatt with a copy of the June 19, 2008, payroll agreement between Brevard Management and ADP, which gave no indication that workers' compensation insurance was included. The evidence at the hearing established that ADP does not automatically provide workers' compensation insurance coverage to entities that enroll for its payroll services. ADP provides such insurance coverage, but only as part of a separate transaction. After receiving authorization from the acting supervisor in the Department's Orlando office, Mr. Wyatt issued the SWO to Brevard Management on August 25, 2008, and personally served it on Mr. Segev on August 26, 2008. On August 25, 2008, Mr. Wyatt gave Mr. Cole a request to produce business records, for the purpose of making a penalty assessment calculation. In response, Mr. Cole provided an employee roster from ADP showing the payroll entries for every Brevard Management employee from the opening of the motel in June 2008 through August 25, 2008. After Mr. Wyatt's visit, Mr. Cole contacted ADP and spoke to Elizabeth Bowen, a workers' compensation sales agent with ADP Insurance Services. Ms. Bowen faxed forms to Mr. Cole to complete in order to obtain a workers' compensation insurance policy. Mr. Cole completed the paperwork and obtained a workers' compensation insurance policy through NorGUARD Insurance Company, effective August 25, 2008. Mr. Cole testified that he believed in good faith that he had obtained workers' compensation insurance at the time he signed up for payroll services with ADP sales representative Clinton Stanley in June 2008. It was only Mr. Wyatt's investigation that alerted Mr. Cole to the fact that Brevard Management did not have the required coverage. Mr. Stanley recalled that Mr. Cole had requested workers' compensation insurance, recalled telling Mr. Cole that his request had to be routed to ADP's separate insurance division, and recalled having forwarded the request to the insurance division. Mr. Stanley had no explanation for why the insurance division did not follow up with Mr. Cole in June 2008. Because he never heard from Mr. Cole again, he assumed that Brevard Management had obtained the requested workers' compensation coverage. It is accepted that Mr. Cole believed that he had purchased the workers' compensation coverage as part of the ADP payroll services; however, the evidence established that Mr. Cole should reasonably have known that this was not the case. Nothing in the June 2008 contractual documentation with ADP indicated that Brevard Management had obtained workers' compensation insurance coverage, and the subsequent ADP payroll registers showed no deductions for workers' compensation insurance. Using the proprietary Scopes Manual developed by the National Council on Compensation Insurance, Inc. (NCCI), Mr. Wyatt assigned Brevard Management's employees the occupation classification code 9052, "Hotel: All Other Employees & Sales Persons, Drivers." This was the same code assigned by Ms. Bowen when she completed the policy paperwork for Brevard Management. Ms. Bowen described this classification as "all inclusive" with respect to hotel employees. Mr. Wyatt calculated an amended penalty based on the payroll records provided by Mr. Cole, from the date Brevard Management became an active limited liability company, June 3, 2008, to the date the SWO was issued, August 25, 2008. Mr. Wyatt divided the total payroll by 100, then multiplied that figure by NCCI's approved manual rate for insurance coverage in 2008 for classification code 9052. That product was then multiplied by 1.5 to arrive at the penalty for the stated period. The total penalty for all employees was $2,112.03. The Amended Order was served on Brevard Management on August 26, 2008, along with the SWO. On August 26, 2008, Mr. Wyatt met with Mr. Cole and Mr. Segev, who produced a copy of the application for workers' compensation insurance placed through NorGUARD Insurance Company and tendered a cashier's check for the full amount of the penalty. The SWO was released on the same day.
Recommendation Having considered the foregoing Findings of Fact, Conclusions of Law, the evidence of record, the candor and demeanor of the witnesses, and the pleadings and arguments of the parties, it is, therefore, RECOMMENDED that a final order be entered by the Department of Financial Services, Division of Workers' Compensation, assessing a penalty of $2,112.03 against Brevard Management, LLC. DONE AND ENTERED this 17th day of April, 2009, in Tallahassee, Leon County, Florida. S LAWRENCE P. STEVENSON Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 17th day of April, 2009. COPIES FURNISHED: Tracy Beal, Agency Clerk Department of Financial Services 200 East Gaines Street Tallahassee, Florida 32399-0390 Honorable Alex Sink Chief Financial Officer Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300 Ben Diamond, General Counsel Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0307 Justin H. Faulkner, Esquire Department of Financial Services Division of Legal Services 200 East Gaines Street Tallahassee, Florida 32399 Albert Segev Brevard Management, LLC, d/b/a River Palm Hotel 420 South Harbor City Boulevard Melbourne, Florida 32901
