The Issue The issues are whether Respondent failed to secure the payment of workers' compensation insurance, and if so, what penalty should be imposed.
Findings Of Fact Petitioner is the agency charged with enforcing the provisions of Chapter 440, Florida Statutes. Respondent is a Florida limited-liability company, organized in 2004. Salvador Rivera is one of the company's managers/officers. On or about February 27, 2009, Respondent secured workers' compensation insurance for its employees. The carrier was Guarantee Insurance Co. In a Notice of Termination of Workers' Compensation Insurance dated August 10, 2009, Guarantee Insurance Co. advised Petitioner and Respondent that Respondent's workers' compensation insurance would be cancelled on August 25, 2009. Guarantee Insurance Co. issued the notice because Respondent had not paid its insurance premium. Some time after receiving the notice from its insurer, Respondent received a check from Brantley Custom Homes. Mr. Rivera deposited the check into Respondent's bank account. Mr. Rivera then wrote a check to Guarantee Insurance Co. for the workers' compensation insurance premium. Mark Piazza is one of Petitioner's compliance investigators. On September 25, 2009, Mr. Piazza conducted a routine compliance check in the Southwood subdivision of Tallahassee, Florida. During the compliance check, Mr. Piazza noticed a new home under construction. He saw two men, Gilberto Torres and Saturino Gonzalez, doing carpentry work at the building site. Under the Scopes Manual, carpentry is identified as construction work under the class code 5645. During an interview with the two men, Mr. Piazza learned that they were employed by Respondent. Mr. Rivera confirmed by telephone that Respondent employed the two men. Mr. Rivera believed that Respondent had workers' compensation coverage on September 25, 2009. Mr. Rivera was not aware that the check from Brantley Custom Homes had bounced, resulting in insufficient funds for Respondent's bank to pay Respondent's check to Guarantee Insurance Co. Mr. Piazza then contacted Respondent's local insurance agent and checked Petitioner's Coverage and Compliance Automated System (CCAS) database to verify Mr. Rivera's claim that Respondent had workers' compensation insurance. Mr. Piazza subsequently correctly concluded that Respondent's insurance policy had been cancelled on August 25, 2009, due to the failure to pay the premium. On September 25, 2009, Mr. Piazza served Respondent with a Stop-work Order and Order of Penalty Assessment. The penalty assessment was 1.5 times the amount of the insurance premium that Respondent should have paid from August 25, 2009, to September 24, 2009. After receiving the Stop-work Order on September 25, 2009, Brantley Custom Homes gave Respondent another check. Mr. Rivera then sent Guarantee Insurance Co. a second check to cover the premium with the understanding that there would be no lapse in coverage. On September 28, 2009, Guarantee Insurance Co. provided Respondent with a notice of Reinstatement or Withdrawal of Policy Termination. The notice states as follows: Our Notice of Termination, filed with the insured and the Department of Labor and Employment Security effective 8/25/2009 and or dated 8/10/2009, is hereby voided and coverage remains in effect for the employer identified below. There is no evidence to show whether Respondent had to sign a no-loss affidavit and submit it to Guarantee Insurance Co. before the insurer would reinstate the policy with no lapse. Such an affidavit usually states that the insured had no claims during the uninsured period, On September 29, 2009, Mr. Piazza served a second copy of the Stop-work Order and Order of Penalty Assessment on Respondent. At that time, Mr. Piazza also served Respondent with a Request for Production of Business Records for Penalty Assessment Calculation. Respondent subsequently provided Petitioner with the records. On October 6, 2009, Mr. Piazza served Respondent with an Amended Order of Penalty Assessment. The assessed penalty was $3,566.27. The assessed penalty was based on Respondent's business records showing the following: (a) Respondent's total payroll from August 25, 2009, through September 24, 2009, was $15,280.00; (b) the total workers' compensation premium that Respondent should have paid for its employees during the relevant time period was $2,377.56; and (c) multiplying $2,377.56 by the statutory factor of 1.5 results in a penalty assessment in the amount of $3,566.37. On October 6, 2009, Petitioner and Respondent entered into a Payment Agreement Schedule for Periodic Payment of Penalty. Respondent gave Petitioner $1,000 as a down payment on the assessed penalty. The balance of the penalty is to be paid in 60 monthly payments in the amount of $42.77 per month, with the exception of the last payment in the amount of $42.64 on November 1, 2014. On October 6, 2009, Petitioner issued an Order of Conditional Release from Stop-work Order. The conditional release states that it will be in place until Respondent pays the assessed penalty in full.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED: That the Department of Financial Services, Division of Workers’ Compensation, issue a final order affirming the Stop- work Order and Amended Order of Penalty Assessment in the amount of $3,566.37. DONE AND ENTERED this 19th day of March, 2010, in Tallahassee, Leon County, Florida. S SUZANNE F. HOOD 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 19th day of March, 2010. COPIES FURNISHED: Salvador Rivera Rivera Construction of North Florida, LLC 931 Rosemary Terrace Tallahassee, Florida 32303 Paige Billings Shoemaker, Esquire Department of Financial Services 200 East Gaines Street Tallahassee, Florida 32399 Julie Jones, CP, FRP, Agency Clerk Department of Financial Services Division of Legal Services 200 East Gaines Street Tallahassee, Florida 32399 Honorable Alex Sink Chief Financial Officer Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399 Benjamin Diamond, General Counsel Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399
The Issue Whether Petitioners' proposed rates are justified pursuant to the requirements of Section 627.062, Florida Statutes, or whether the Department of Financial Services, Office of Insurance Regulation (OIR) was correct in denying the requested rate increases.
Findings Of Fact The Hartford companies are property and casualty insurers transacting insurance in the State of Florida pursuant to valid certificates of authority and the Florida Insurance Code. Two types of personal lines insurance filings submitted by Hartford to the OIR are at issue in this proceeding: two filings for homeowners insurance (Case Nos. 07-5185 and 07-5186) and two filings for dwelling fire insurance (Case Nos. 07-5187 and 07- 5188). Hartford's substantial interests are affected by the notices disapproving the filings in this case. Homeowners insurance includes coverage for a variety of perils in and around a home, is usually purchased by a homeowner, and covers both the structure and the contents of a home. Dwelling/fire insurance is usually purchased by the owners of properties that are leased or rented to others, and provides coverage for the structure only. Both types of insurance cover damage caused by hurricanes. The New Legislation and its Requirements In a special session held in January 2007, the Florida Legislature enacted changes to the Florida Hurricane Catastrophe Fund (CAT Fund), as reflected in Chapter 2007-1, Laws of Florida. The special session was precipitated by a perceived crisis regarding the cost and availability of homeowners insurance after the 2004 and 2005 hurricane seasons. As a result of the substantial number of claims incurred after multiple severe hurricanes each of these years, changes in the insurance marketplace resulted in some insurance companies withdrawing from the Florida market, others non-renewing policies, one company becoming insolvent, and the cost for reinsurance available to all insurers rising dramatically. One of the primary features of the legislation was an expansion of the CAT Fund. The CAT Fund was established in 1993 after Hurricane Andrew to provide reinsurance to insurers for property insurance written in Florida at a price significantly less than the private market. The CAT Fund is a non-profit entity and is tax exempt. Prior to the enactment of Chapter 2007-1, the CAT Fund had an industry-wide capacity of approximately $16 million. The purpose of the changes enacted by the Legislature was to reduce the cost of reinsurance and thereby reduce the cost of property insurance in the state. As a result of Chapter 2007-1, the industry-wide capacity of the CAT Fund was increased to $28 billion, and insurers were given an opportunity to purchase an additional layer of reinsurance, referred to as the TICL layer (temporary increase in coverage limit), from the CAT Fund. Section 3 of Chapter 2007-1 required insurers to submit a filing to the OIR for policies written after June 1, 2007, that took into account a "presumed factor" calculated by OIR and that purported to reflect savings created by the law. The new law delegated to the OIR the duty to specify by Order the date such filings, referred to as "presumed factor filings" had to be made. On February 19, 2007, the OIR issued Order No. 89321-07. The Order required insurers to make a filing by March 15, 2007, which either adopted presumed factors published by the OIR or used the presumed factors and reflected a rate decrease taking the presumed factors into account. The presumed factors were the amounts the OIR calculated as the average savings created by Chapter 2007-1, and insurers were required to reduce their rates by an amount equal to the impact of the presumed factors. The OIR published the presumed factors on March 1, 2007. In its March 15, 2007, filings, Hartford adopted the presumed factors published by OIR. As a result, Hartford reduced its rates, effective June 1, 2007, on the products at issue in these filings by the following percentages: Case No. 07-5185 homeowners product: 17.7% Case No. 07-5186 homeowners product: 21.9% Case No. 07-5187 dwelling/fire product: 8.7% Case No. 07-5188 dwelling/fire product: 6.2% The Order also required that insurers submit a "True-Up Filing" pursuant to Section 627.026(2)(a)1., Florida Statutes. The filing was to be a complete rate filing that included the company's actual reinsurance costs and programs. Hartford's filings at issue in these proceedings are its True-Up Filings. The True-Up Filings Hartford submitted its True-Up filings June 15, 2007. The rate filings were certified as required by Section 627.062(9), Florida Statutes. The filings were amended August 8, 2007. Hartford's True Up Filings, as amended, request the following increases in rates over those reflected in the March 15, 2007, presumed factor filings: Case No. 07-5185 homeowners product: 22.0% Case No. 07-5186 homeowners product: 31.6% Case No. 07-5187 dwelling and fire product: 69.0% Case No. 07-5188 dwelling and fire product: 35.9% The net effects of Hartford's proposed rate filings result in the following increases over the rates in place before the Presumed Factor Filings: Case No. 07-5185 homeowners product: .4% Case No. 07-5186 homeowners product: 2.8% Case No. 07-5187 dwelling/fire product: 54.3% Case No. 07-5188 dwelling/fire product: 27.5% Case Nos. 07-5185 and 07-5186 (homeowners) affect approximately 92,000 insurance policies. Case Nos. 07-5187 and 07-5188 (dwelling/fire) affect approximately 2,550 policies. A public hearing was conducted on the filings August 16, 2007. Representatives from Hartford were not notified prior to the public hearing what concerns the OIR might have with the filings. Following the hearing, on August 20, 2007, Petitioners provided by letter and supporting documentation additional information related to the filings in an effort to address questions raised at the public hearing. The OIR did not issue clarification letters to Hartford concerning any of the information provided or any deficiencies in the filings before issuing its Notices of Intent to Disapprove the True-Up Filings. All four filings were reviewed on behalf of the OIR by Allan Schwartz. Mr. Schwartz reviewed only the True-Up Filings and did not review any previous filings submitted by Hartford with respect to the four product lines. On September 10, 2007, the OIR issued Notices of Intent to Disapprove each of the filings at issue in this case. The reasons give for disapproving the two homeowners filings are identical and are as follows: Having reviewed the information submitted, the Office finds that this filing does not provide sufficient documentation or justification to demonstrate that the proposed rate(s) comply with the standards of the appropriate statute(s) and rules(s) including demonstrating that the proposed rates are not excessive, inadequate, or unfairly discriminatory. The deficiencies include but are not limited to: The premium trends are too low and are not reflective of the historical pattern of premium trends. The loss trends are too high and are not reflective of the historical pattern of loss trends. The loss trends are based on an unexplained and undocumented method using "modeled" frequency and severity as opposed to actual frequency and severity. The loss trends are excessive and inconsistent compared to other sources of loss trends such as Fast Track data. The catastrophe hurricane losses, ALAE and ULAE amounts are excessive and not supported. The catastrophe non-hurricane losses, ALAE and ULAE amounts are excessive and not supported. The particular time period from 1992 to 2006 used to calculate these values has not been justified. There has been no explanation of why the extraordinarily high reported losses for 1992 and 1993 should be expected to occur in the future. The underwriting profit and contingency factors are excessive and not supported. Various components underlying the calculation of the underwriting profit and contingency factors, including but not limited to the return on surplus, premium to surplus ratio, investment income and tax rate are not supported or justified. The underwriting expenses and other expenses are excessive and not supported. The non-FHCF reinsurance costs are excessive and not supported. The FHCF reinsurance costs are excessive and not supported. The fact that no new business is being written has not been taken into account. No explanation has been provided as too [sic] Hartford believes it is reasonable to return such a low percentage of premium in the form of loss payments to policyholders. For example, for the building policy forms, only about 40% of the premium requested by Hartford is expected to be returned to policyholders in the form of loss payments. As a result of the deficiencies set forth above, the Office finds that the proposed rate(s) are not justified, and must be deemed excessive and therefore, the Office intends to disapprove the above-referenced filing. The Notices of Intent to Disapprove the two dwelling/fire filings each list nine deficiencies. Seven of the nine (numbers 1-6 and 8) are the same as deficiencies listed for the homeowners filings. The remaining deficiencies named for Case No. 07-5187 are as follows: 7. The credibility standard and credibility value are not supported. 9. No explanation has been provided as too (sic) why Hartford believes it needs such a large rate increase currently, when the cumulative rate change implemented by Hartford for this program from 2001 to 2006 was an increase of only about 10%. The deficiencies listed for Case No. 07-5188 are the same as those listed for Case No. 07-5187, with the exception that with respect to deficiency number 9, the rate change implemented for the program in Case No. 07-5188 from 2001 to 2006 was a decrease of about -3%. Documentation Required for the Filings Florida's regulatory framework, consistent with most states, requires that insurance rates not be inadequate, excessive, or unfairly discriminatory. In making a determination concerning whether a proposed rate complies with this standard, the OIR is charged with considering certain enumerated factors in accordance with generally accepted and reasonable actuarial techniques. Chapter 2007-1 also amended Section 627.062, Florida Statutes, to add a certification requirement. The amendment requires the chief executive officer or chief financial officer and chief actuary of a property insurer to certify under oath that they have reviewed the rate filing; that to their knowledge, the rate filing does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which the statements were made, not misleading; that based on their knowledge, the information in the filing fairly presents the basis of the rate filing for the period presented; and that the rate filing reflects all premium savings reasonably expected to result from legislative enactments and are in accordance with generally accepted and reasonable actuarial techniques. § 627.062(9)(a), Fla. Stat. (2007). Actuarial Standards of Practice 9 and 41 govern documentation by an actuary. Relevant sections of Standard of Practice 9 provide: Extent of documentation - . . . Appropriate records, worksheets, and other documentation of the actuary's work should be maintained by the actuary and retained for a reasonable length of time. Documentation should be sufficient for another actuary practicing in the same field to evaluate the work. The documentation should describe clearly the sources of data, material assumptions, and methods. Any material changes in sources of data, assumptions, or methods from the last analysis should be documented. The actuary should explain the reason(s) for and describe the impact of the changes. Prevention of misuse - . . . The actuary should take reasonable steps to ensure that an actuarial work product is presented fairly, that the presentation as a whole is clear in its actuarial aspects, and that the actuary is identified as the source of the actuarial aspects, and that the actuary is available to answer questions.. . . . * * * 5.5 Availability of documentation- Documentation should be available to the actuary's client or employer, and it should be made available to other persons when the client or employer so requests, assuming appropriate compensation, and provided such availability is not otherwise improper. . . . In determining the appropriate level of documentation for the proposed rate filings, Petitioner relied on its communications with OIR, as well as its understanding of what has been required in the past. This reliance is reasonable and is consistent with both the statutory and rule provisions governing the filings. Use of the RMS Catastrophic Loss Projection Model In order to estimate future losses in a rate filing, an insurer must estimate catastrophic and non-catastrophic losses. Hartford's projected catastrophic losses in the filings are based upon information provided from the Risk Management Solutions (RMS) catastrophic loss projection model, version 5.1a. Hartford's actuaries rely on this model, consistent with the standards governing actuarial practice, and their reliance is reasonable. Catastrophe loss projection models may be used in the preparation of insurance filings, if they have been considered by and accepted by the Florida Commission on Hurricane Loss Projection Methodology (the Hurricane Commission). The Hurricane Commission determined that the RMS model, version 5.1a was acceptable for projecting hurricane loss costs for personal residential rate filings on May 17, 2006. In addition to approval by the Hurricane Commission, use of the model is appropriate "only if the office and the consumer advocate appointed pursuant to s. 627.0613 have access to all of the assumptions and factors that were used in developing the actuarial methods, principles, standards, models, or output ranges, and are not precluded from disclosing such information in a rate proceeding." §627.0628(3)(c), Fla. Stat. Both the Consumer Advocate and a staff person from the OIR are members of the Hurricane Commission. In that context, both have the ability to make on-site visits to the modeling companies, and to ask any questions they choose regarding the models. Both OIR's representative and the Consumer Advocate participated in the meetings and had the same opportunity as other commissioners to ask any question they wished about RMS 5.1a. The Hurricane Commission members, including the Consumer Advocate, clearly have access to the information identified in Section 627.0628(3)(c). However, there are restrictions on the Hurricane Commission members' ability to share the information received regarding trade secrets disclosed by the modeling companies. For that reason, the Commission's deliberations are not, standing alone, sufficient to determine that the Office of Insurance Regulation has access. In this case, credible evidence was submitted to show that RMS officials met with staff from the Office in July and October 2006 to discuss the model. RMS offered to provide any of its trade secret information to the OIR, subject to a non- disclosure agreement to protect its dissemination to competitors. RMS also opened an office in Tallahassee and invited OIR staff to examine any parts of the model they wished. In addition, both RMS and Hartford have answered extensive questionnaires prepared by OIR regarding the RMS model, and Hartford has offered to assist OIR in gathering any additional information it requires. Most of the questions posed by OIR involve the same areas reviewed by the Commission. RMS' representative also testified at hearing that RMS would not object to disclosure of the assumptions during the hearing itself if necessary. Finally, OIR Exhibit 1 is the Florida Hurricane Catastrophe Fund 2007 Ratemaking Formula Report. The Executive Summary from the report explains how rates were recommended for the Florida Hurricane Catastrophic Fund (CAT Fund) for the 2007- 2008 contract year. The report stated that the RMS model, as well as three other models accepted by the Hurricane Commission, were used for determining expected aggregate losses to the CAT Fund reinsurance layer. Three models, including the RMS model, were also used for analysis of detailed allocation to type of business, territory, construction and deductible, as well as special coverage questions. The models were compared in detail and given equal weight. The report notes that these three models were also used in 1999-2006 ratemaking. The report is prepared by Paragon Strategic Solutions, Inc., an independent consultant selected by the State Board of Administration, in accordance with Section 215.555(5), Florida Statutes. While OIR did not prepare the report, they show no hesitation in accepting and relying on the report and the modeled information it contains in these proceedings. Indeed, one of OIR's criticisms is Hartford's failure to use the report with respect to CAT Fund loss recovery estimates. Based upon the evidence presented at hearing, it is found that the OIR and Consumer Advocate were provided access to the factors and assumptions used in the RMS model, as contemplated by Section 627.0628. The Alleged Deficiencies in the Homeowners Filings1/ A rate is an estimate of the expected value of future costs. It provides for all costs associated with the transfer of risk. A rate is reasonable and not excessive, inadequate or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer. In preparing a filing, an actuary identifies the time period that its proposed rates are expected to be in effect. Because ratemaking is prospective, it involves determining the financial value of future contingent events. For the rate filings in question, actuaries for Hartford developed their rate indications by first considering trended premium, which reflects changes in premium revenue based on a variety of factors, including construction costs and the value of the buildings insured. Trended premium is the best estimate of the premium revenue that will be collected if the current rates remain in effect for the time period the filing is expected to be in place. Expenses associated with writing and servicing the business, the reinsurance costs to support the business and an allowance for profit are subtracted from the trended premium. The remainder is what would be available to pay losses. This approach to ratemaking, which is used by Hartford, is a standard actuarial approach to present the information for a rate indication. As part of the process, expected claims and the cost to service and settle those claims is also projected. These calculations show the amount of money that would be available to pay claims if no changes are made in the rates and how much increased premium is necessary to cover claims. The additional amount of premium reflects not only claims payments but also taxes, licenses and fees that are tied to the amount of premium. The first deficiency identified by OIR is that "the premium trends are too low and are not reflective of the historical pattern of premium trends." In determining the premium trend in each filing, Hartford used data from the previous five years and fit an exponential trend to the historical pattern, which is a standard actuarial technique. Hartford also looked at the factors affecting the more recent years, which were higher. For example, the peak in premium trend in 2006 was a result of the cost increases driven by the 2004 and 2005 hurricanes, and the peak in demand for labor and construction supplies not matched by supply. Costs were coming down going into 2007, and Hartford believed that 2006 was out of pattern from what they could anticipate seeing in the future. The premium trends reflected in Hartford's filings are reasonable, reflective of historical patterns, and based on standard actuarial techniques. The second identified deficiency with respect to the homeowner filings was that the loss trends are too high and are not reflective of the historical pattern of loss trends. A loss trend reflects the amount an insurance company expects the cost of claims to change. It consists of a frequency trend, which is the number of claims the insurance company expects to receive, and a severity trend, which is the average cost per claim. The loss trend compares historical data used in the filing with the future time period when the new rates are expected to be in effect. Hartford's loss trends were estimated using a generalized linear model, projecting frequency and severity separately. The model was based on 20 quarters of historical information. The more credible testimony presented indicates that the loss trends were actuarially appropriate. The third identified deficiency is that the loss trends are based on an unexplained and undocumented method using "modeled" frequency and severity as opposed to actual frequency and severity. As noted above, the generalized linear model uses actual, historical data. Sufficient documentation was provided in the filing, coupled with Hartford's August 20, 2007, letter. The method used to determine loss trends is reasonable and is consistent with standard actuarial practice. The fourth identified deficiency is that loss trends are excessive and inconsistent compared to other sources of loss trends, such as Fast Track data. Saying that the loss trends are excessive is a reiteration of the claim that they are too high, already addressed with respect to deficiency number two. Fast Track data is data provided by the Insurance Services Office. It uses unaudited information and is prepared on a "quick turnaround" basis. Fast Track data is based on paid claims rather than incurred claims data, and upon a broad number of companies with different claims settlement practices. Because it relies on paid claims, there is a time lag in the information provided. Hartford did not rely on Fast Track data, but instead relied upon its own data for calculating loss trends. Given the volume of business involved, Hartford had enough data to rely on for projecting future losses. Moreover, Respondents point to no statutory or rule requirement to use Fast Track data. The filings are not deficient on this basis. The fifth identified deficiency in the Notice of Intent to Disapprove is that catastrophe hurricane losses, ALAE and ULAE amounts are excessive and not supported. ALAE stands for "allocated loss adjustment expenses," and represents the costs the company incurs to settle a claim and that can be attributed to that particular claim, such as legal bills, court costs, experts and engineering reports. By contrast, ULAE stands for "unallocated loss adjustment expense" and represents the remainder of claims settlement costs that cannot be linked to a specific claim, such as office space, salaries and general overhead. Part of the OIR's objection with respect to this deficiency relates to the use of the RMS model. As stated above at paragraphs 25-33, the use of the RMS model is reasonable. With respect to ALAE, Hartford analyzed both nationwide data (4.4%) and Florida data (4.8%) and selected an ALAE load between the two (4.6%). This choice benefits Florida policyholders. It is reasonable to select between the national and Florida historical figures, given the amount of actual hurricane data available during the period used. With respect to ULAE, the factors used were based upon directions received from Ken Ritzenthaler, an actuary with OIR, in a previous filing. The prior discussions with Mr. Ritzenthaler are referenced in the exhibits to the filing. The more credible evidence demonstrates that the ALAE and ULAE expenses with respect to catastrophic hurricane losses are sufficiently documented in Hartford's filings and are based on reasonable actuarial judgment. The sixth identified deficiency is that the catastrophe non-hurricane losses, ALAE and ULAE amounts are excessive and not supported. According to OIR, the particular time period from 1992 to 2006 used to calculate these values has not been justified, and there has been no explanation of why the extraordinarily high reported losses for 1992 and 1993 should be expected to occur in the future. OIR's complaint with respect to non-hurricane losses is based upon the number of years of data included. While the RMS model was used for hurricane losses, there is no model for non- hurricane losses, so Hartford used its historical data. This becomes important because in both 1992 and 1993, there were unusual storms that caused significant losses. Hartford's data begins with 1992 and goes through 2006, which means approximately fifteen years worth of data is used. Hartford's explanation for choosing that time period is that hurricane models were first used in 1992, and it was at that time that non-hurricane losses had to be separated from hurricane losses. Thus, it was the first year that Hartford had the data in the right form and sufficient detail to use in a rate filing. Petitioners have submitted rate filings in the past that begin non-hurricane, ALAE and ULAE losses with 1992, increasing the number of years included in the data with each filing. Prior filings using this data have been approved by OIR. It is preferable to use thirty years of experience for this calculation. However, there was no testimony that such a time-frame is actuarially or statutorily required, and OIR's suggestion that these two high-loss years should be ignored is not based upon any identified actuarial standard. Hartford attempted to mitigate the effect of the severe losses in 1992 and 1993 by capping the losses for those years, as opposed to relying on the actual losses.2/ The methodology used by Hartford was reasonable and appropriate. No other basis was identified by the OIR to support this stated deficiency. The seventh identified deficiency is that the underwriting profit and contingency factors are excessive and not supported. The underwriting profit factor is the amount of income, expressed as a percentage of premium, that an insurance company needs from premium in excess of losses, settlement costs and other expenses in order to generate a fair rate of return on its capital necessary to support its Florida exposures for the applicable line of business. Hartford's proposed underwriting profit factor for its largest homeowners filing is 15.3%. Section 627.062(2)(b), Florida Statutes, contemplates the allowance of a reasonable rate of return, commensurate with the risk to which the insurance company exposes its capital and surplus. Section 627.062(2)(b)4., Florida Statutes, authorizes the adoption of rules to specify the manner in which insurers shall calculate investment income attributable to classes of insurance written in Florida, and the manner in which investment income shall be used in the calculation of insurance rates. The subsection specifically indicates that the manner in which investment income shall be used in the calculation of insurance rates shall contemplate allowances for an underwriting profit factor. Florida Administrative Code Rule 69O-170.003 is entitled "Calculation of Investment Income," and the stated purpose of this rule is as follows: (1) The purpose of this rule is to specify the manner in which insurers shall calculate investment income attributable to insurance policies in Florida and the manner in which such investment income is used in the calculation of insurance rates by the development of an underwriting profit and contingency factor compatible with a reasonable rate of return. (Emphasis supplied). Mr. Schwartz relied on the contents of this rule in determining that the underwriting profit factor in Hartford's filings was too high, in that Florida Administrative Code Rule 69O-170.003(6)(a) and (7) specifies that: (6)(a) . . . An underwriting profit and contingency factor greater than the quantity 5% is prima facie evidence of an excessive expected rate of return and unacceptable, unless supporting evidence is presented demonstrating that an underwriting profit and contingency factor included in the filing that is greater than this quantity is necessary for the insurer to earn a reasonable rate of return. In such case, the criteria presented as determined by criteria in subsection (7) shall be used by the Office of Insurance Regulation in evaluating this supporting evidence. * * * An underwriting profit and contingency factor calculated in accordance with this rule is considered to be compatible with a reasonable expected rate of return on net worth. If a determination must be made as to whether an expected rate of return is reasonable, the following criteria shall be used in that determination. An expected rate of return for Florida business is to be considered reasonable if, when sustained by the insurer for its business during the period for which the rates under scrutiny are in effect, it neither threatens the insurer's solvency nor makes the insurer more attractive to policyholders or investors from a corporate financial perspective than the same insurer would be had this rule not been implemented, all other variables being equal; or Alternatively, the expected rate of return for Florida business is to be considered reasonable if it is commensurate with the rate of return anticipated for other industries having corresponding risk and it is sufficient to assure confidence in the financial integrity of the insurer so as to maintain its credit and, if a stock insurer, to attract capital, or if a mutual or reciprocal insurer, to accumulate surplus reasonably necessary to support growth in Florida premium volume reasonably expected during the time the rates under scrutiny are in effect. Mr. Schwartz also testified that the last published underwriting profit and contingency factor published by OIR was 3.7%, well below what is identified in Hartford's filings. Hartford counters that reliance on the rule is a misapplication of the rule (with no explanation why), is inconsistent with OIR's treatment of the profit factors in their previous filings, and ignores the language of Section 627.062(2)(b)11., Florida Statutes. No evidence was presented to show whether the expected rate of return threatens Hartford's solvency or makes them more attractive to policyholders or investors from a corporate financial perspective than they would have been if Rule 69O- 170.003 was not implemented. Likewise, it was not demonstrated that the expected rate of return for Florida business is commensurate with the rate of return for other industries having corresponding risk and is necessary to assure confidence in the financial integrity of the insurer in order to maintain its credit and to attract capital. While the position taken by OIR with respect to Hartford's filings may be inconsistent with the position taken in past filings, that cannot be determined on this record. The prior filings, and the communications Hartford had with OIR with regard to those filings, are not included in the exhibits in this case. There is no way to determine whether Petitioners chose to present evidence in the context of prior filings consistent with the criteria in Rule 69O-170.003, or whether OIR approved the underwriting profit and contingency factor despite Rule 69O- 170.003. Having an underwriting profit factor that is considered excessive will result in a higher rate indication. Therefore, it is found that the seventh identified deficiency in the Notices of Intent to Disapprove for the homeowners filings and the second identified deficiency in the Notices of Intent to Disapprove for the dwelling/fire filings is sustained. The eighth identified deficiency is that various components underlying the calculation of the underwriting profit and contingency factors, including but not limited to the return on surplus, premium to surplus ratio, investment income and tax rate are not supported or justified. Return on surplus is the total net income that would result from the underwriting income and the investment income contributions relative to the amount of capital that is exposed. Surplus is necessary in addition to income expected from premium, to insure that claims will be paid should losses in a particular year exceed premium and income earned on premium. Hartford's expected return on surplus in these filings is 15%. The return on surplus is clearly tied to the underwriting profit factor, although the percentages are not necessarily the same. It follows, however, that if the underwriting income and contingency factor is excessive, then the return on surplus may also be too high. Hartford has not demonstrated that the return on surplus can stand, independent of a finding that the underwriting profit and contingency factor is excessive. Premium-to-surplus ratio is a measure of the number of dollars of premium Hartford writes relative to the amount of surplus that is supporting that exposure. Hartford's premium-to- surplus ratio in the AARP homeowners filing is 1.08, which means that if Hartford wrote $108 of premium, it would allocate $100 of surplus to support that premium.3/ The premium-to-surplus ratio is reasonable, given the amount of risk associated with homeowners insurance in Florida. The OIR's position regarding investment income and tax rates are related. The criticism is that the filing used a low- risk investment rate based on a LIBOR (London Interbank Offering Rate), which is a standard in the investment community for risk- free or low-risk yield calculations. The filing also used a full 35% income tax rate applied to the yield. Evidence was presented to show that, if the actual portfolio numbers and corresponding lower tax rate were used in the filings, the rate after taxes would be the same. The problem, however, is that Section 627.062(2)(b)4., Florida Statutes, requires the OIR to consider investment income reasonably expected by the insurer, "consistent with the insurer's investment practices," which assumes actual practices. While the evidence at hearing regarding Hartford's investments using its actual portfolio yield may result in a similar bottom line, the assumptions used in the filing are not based on Petitioner's actual investment practices. As a result, the tax rate identified in the filing is also not the actual tax rate that has been paid by Hartford. The greater weight of the evidence indicates the data used is not consistent with the requirements of Section 627.062(2)(b)4., Florida Statutes. Therefore, the eighth deficiency is sustained to the extent that the filing does not adequately support the return on surplus, investment income and tax rate. The ninth identified deficiency is that the underwriting expenses and other expenses are excessive and not supported. Hartford used the most recent three years of actual expense data, analyzed them and made expense selections based on actuarial judgment. The use of the three-year time frame was both reasonable and consistent with common ratemaking practices. Likewise, the commission rates reflected in the agency filings are also reasonable. The tenth identified deficiency is that the non-FHCF (or private) reinsurance costs are excessive and not supported. The criticism regarding private reinsurance purchases is three- fold: 1) that Hartford paid too much for their reinsurance coverage; 2) that Hartford purchases their reinsurance coverage on a nationwide basis as opposed to purchasing coverage for Florida only; and 3) that the percentage of the reinsurance coverage allocated to Florida is too high. Hartford buys private reinsurance in order to write business in areas that are exposed to catastrophes. It buys reinsurance from approximately 40 different reinsurers in a competitive, arm's-length process and does not buy reinsurance from corporate affiliates. Hartford used the "net cost" of insurance in its filings, an approach that is appropriate and consistent with standard actuarial practices. Hartford also used the RMS model to estimate the expected reinsurance recoveries, which are subtracted from the premium costs. Hartford buys private catastrophic reinsurance on a nationwide basis to protect against losses from hurricanes, earthquakes and terrorism, and allocates a portion of those costs to Florida. Testimony was presented, and is accepted as credible, that attempting to purchase reinsurance from private vendors for Florida alone would not be cost-effective. The cost of reinsurance, excluding a layer of reinsurance that covers only the Northeast region of the country and is not reflected in calculating costs for Florida, is approximately $113 million. Hartford retains the first $250 million in catastrophe risk for any single event, which means losses from an event must exceed that amount before the company recovers from any reinsurer. In 2006, Hartford raised its retention of losses from $175 million to $250 million in an effort to reduce the cost of reinsurance. Hartford purchases reinsurance in "layers," which cover losses based on the amount of total losses Hartford incurs in various events. Hartford allocates approximately 65% of the private reinsurance costs (excluding the Northeast layer) to Florida in the AARP homeowners filing. Only 6-7% of Hartford's homeowners policies are written in Florida. The amount Hartford paid for reinsurance from private vendors is reasonable, given the market climate in which the insurance was purchased. Hartford has demonstrated that the process by which the reinsurance was purchased resulted in a price that was clearly the result of an arms-length transaction with the aim of securing the best price possible. Likewise, the determination to purchase reinsurance on a nationwide basis as opposed to a state-by-state program allows Hartford to purchase reinsurance at a better rate, and is more cost-effective. Purchasing reinsurance in this manner, and then allocating an appropriate percentage to Florida, is a reasonable approach. With respect to the allocation of a percentage of reinsurance cost to Florida, OIR argues that, given that Florida represents only 6-7% of Hartford's homeowner insurance business, allocation of 65% of the reinsurance costs to Florida is per se unreasonable. However, the more logical approach is to examine what percentage of the overall catastrophic loss is attributable to Florida, and allocate reinsurance costs accordingly. After carefully examining both the testimony of all of the witnesses and the exhibits presented in this case, the undersigned cannot conclude that the allocation of 65% of the private reinsurance costs is reasonable, and will not result in an excessive rate.4/ The eleventh identified deficiency is that the FHCF (or CAT Fund) reinsurance costs are excessive and not supported. Hartford purchases both the traditional layer of CAT Fund coverage, which is addressed in a separate filing and not reflected in these filings, and the TICL layer made available pursuant to Chapter 2007-1, Laws of Florida. Hartford removed the costs of its previously purchased private reinsurance that overlapped with the TICL layer and those costs are not reflected in these filings and have not been passed on to Florida policyholders. In estimating the amount of premium Hartford would pay for the TICL coverage, it relied on information provided by Paragon, a consulting firm that calculates the rates for the CAT Fund. As noted in finding of fact number 31, the RMS model, along with three other models accepted by the Hurricane Commission, were used by Paragon for determining expected aggregate losses to the CAT Fund reinsurance layer, clearly a crucial factor in determining the rate for the CAT fund. Hartford did not use the loss recoveries calculated by Paragon, but instead estimated the total amount of premium it would pay for the TICL coverage and subtracted the expected loss recoveries based on the RMS model alone. The expected loss recoveries under the RMS model standing alone were 60% of the loss recovery estimate calculated by Paragon when using all four models. Hartford claimed that its use of the RMS model was necessary for consistency. However, it pointed to no actuarial standard that would support its position with respect to this particular issue. Moreover, given that the premium used as calculated by Paragon used all four models, it is actually inconsistent to use one number which was determined based on all four models (the Paragon-based premium estimate) for one half of this particular calculation and then subtract another number using only one model for the other half (the loss recoveries rate) in order to determine the net premium. To do so fails to take into account the unique nature of the CAT fund, in terms of its low expenses and tax-exempt status. Accordingly, it is found that the CAT-Fund reinsurance costs for the TICL layer are excessive. The twelfth identified deficiency is that Hartford did not consider in the filing that no new business is being written. OIR's explanation of this asserted deficiency is that the costs associated with writing new business are generally higher than that associated with writing renewals. Therefore, according to OIR, failure to make adjustments to their historical experience to reflect the current mix of business, means that the costs included in the filing would be excessive. Hartford began restricting the writing of new business for these filings in 2002. Ultimately, no new business for the AARP program was written after November 2006 and no new business was written for the agency program after June 2006. Credible evidence was presented to demonstrate that a very low percentage of new business has been written over the period of time used for demonstrating Hartford's historical losses. As a result, the effect of no longer writing new business is already reflected in the data used to determine expenses. No additional adjustment in the filing was necessary in this regard. The thirteenth identified deficiency is that no explanation has been provided as to why Hartford believes it is reasonable to return such a low percentage of premium in the form of loss payments to policyholders. For example, for the building policy forms, OIR states that only about 40% of the premium requested by Hartford is expected to be returned to policyholders in the form of loss payments. OIR pointed to no actuarial standard that would require a specific explanation regarding how much of the premium should be returned to policyholders. Nor was any statutory or rule reference supplied to support the contention that such an explanation was required. Finally, the more credible evidence presented indicates that the correct percentage is 44%. In any event, this criticism is not a basis for finding a deficiency in the filing. Alleged Deficiencies in the Dwelling/Fire Filings The seventh deficiency identified in the dwelling/fire filings, not reflected in the homeowner filings, is that the credibility standard and credibility values are not supported. Credibility is the concept of identifying how much weight to put on a particular set of information relative to other potential information. Credibility value is determined by applying the "square root rule" to the credibility value, a commonly used actuarial approach to credibility. Hartford used the credibility standard of 40,000 earned house years in these filings. This credibility standard has been the standard within the industry for personal property filings for over forty years and has been used in prior filings submitted to OIR. Mr. Schwartz testified that his criticism with respect to the credibility standard and credibility values is that Hartford did not explain why they used that particular standard. However, Florida Administrative Code Rule 69O-170.0135 discusses those items that must be included in the Actuarial Memorandum for a filing. With respect to credibility standards and values, Rule 69O-170.0135(2)(e)5., provides that the basis need only be explained when the standard has changed from the previous filing. Given that no change has been made in these filings with respect to the credibility standard, this criticism is not a valid basis for issuing a Notice of Intent to Disapprove. The ninth deficiency in the Notice relating to the dwelling/fire filing in Case No. 07-5187 provides: "No explanation has been provided as too (sic) why Hartford believes it needs such a large rate increase currently, when the cumulative rate change implemented by Hartford for this program from 2001 to 2006 was an increase of only about 10%." With respect to Case No. 07-5188, the deficiency is essentially the same, except the cumulative rate change identified for the same period of time is a decrease of about -3%. Testimony established that the dwelling/fire rate increases were larger than those identified for the homeowners filings because Hartford did not seek rate increases for these lines for several years. The decision not to seek increases was not based on the adequacy of current rates. Rather, the decision was based on an internal determination that, based on the relatively small number of policies involved in these two filings, the amount of increased premium reflected in a rate increase was not sufficient to incur the costs associated with preparing the filings. Mr. Schwartz pointed to no authority, either in statute, rule, or Actuarial Standard, that requires the explanation he desired. He acknowledged that he understood the basis of how Hartford reached the rate increase they are requesting. The failure to provide the explanation Mr. Schwartz was seeking is not a valid basis for a Notice of Intent to Disapprove.
Recommendation Upon consideration of the facts found and conclusions of law reached, it is RECOMMENDED: That a final order be entered that disapproves the rate filings in Case Nos. 07-5185 and 07-5186 based upon the deficiencies numbered 7,8,10 and 11 in the Notices of Intent to Disapprove, and that disapproves the rate filings in Case Nos. 07-5187 and 07-5188 based on the deficiencies numbered 2,3,5 and in the Notices of Intent to Disapprove. DONE AND ENTERED this 28th day of March 2008, in Tallahassee, Leon County, Florida. S LISA SHEARER NELSON 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 28th day of March, 2008.
The Issue The issue presented is whether Respondent is guilty of the allegations contained in the Administrative Complaint filed against him, and, if so, what disciplinary action should be taken against him, if any.
Findings Of Fact At all times material hereto, Respondent has been licensed in Florida as a life and variable annuity contracts salesman and as a life and health insurance agent. In 1994 twin sisters Edith Ellis and Gertrude Franklin attended a luncheon at which Respondent made a presentation. The sisters were then 79 years old, and both were the owners of single-premium insurance policies issued by Merrill Lynch. They decided to cash in their existing policies and purchase new policies through Respondent. Both Ellis and Franklin executed 1035 exchange forms whereby the monies obtained from cashing in their Merrill Lynch policies were transferred to the insurance companies issuing their new policies. Both were charged a substantial penalty by Merrill Lynch. On August 11, 1994, Security Connecticut Insurance Company issued to Edith Ellis a flexible premium adjustable life insurance policy with a face value of $150,000. The cover page of the policy recites in bold print that it is a flexible premium adjustable life insurance policy, directs the insured to read the policy, and provides a 20-day period for canceling the policy with a full refund. It also contains a statement that provides: This Policy provides flexible premium, adjustable life insurance to the Maturity Date. Coverage will end prior to the Maturity Date if premiums paid and interest credited are insufficient to continue coverage to that date. Dividends are not payable. Flexible premiums are payable to the end of the period shown, if any, or until the Insured's death, whichever comes first. The cover page also recites that the first premium is $75,000 and that the monthly premium is $805.75. After deductions, Merrill Lynch only transferred $44,928.81, and Ellis never paid any additional premiums. Therefore, the policy was not funded to maturity since the company only received a partial payment. The insurance company did not set up this policy to receive periodic premium payments because it was originally anticipated that the company would receive $75,000 which would carry the expense, based upon the then interest rate. The policy was dependent upon interest rates. The company sent annual statements, however, to both Ellis and to the agency where Respondent worked. These statements clearly showed a declining accumulated value for the policy and specified how much it had declined from the previous year. When Ellis surrendered the policy on July 3, 2002, its value was $4,849. First Colony Life Insurance issued a flexible premium adjustable life insurance policy to Gertrude Franklin on October 18, 1994, with a face value of $600,000. The cover page provides for a 20-day cancellation period with a full refund of premiums paid. In bold type, the cover page further advises as follows: "Flexible Premium Adjustable Life Insurance Policy", "Adjustable Death Benefit Payable at Death", "Flexible Premiums Payable During Insured's Lifetime", and "Benefits Vary with Current Cost of Insurance Rates and Current Interest Rates." It also advises that the initial premium is $56,796. The insurance company received an initial premium payment of $203,993.75 on December 19, 1994, and an additional premium payment in February 1996, for a total of premiums paid of approximately $266,000. The total premiums received, however, were insufficient to fund the policy to maturity since that would have required in excess of $400,000 in premiums. Annual statements sent by the insurance company reflected that the policy value was declining. On August 26, 1996, the insurance company received a letter over the name of Nancy Franklin, the trustee of the trust which owned the policy, advising the company to send billing and annual statements to the address of the agency where Respondent was employed. Respondent sent that letter as a courtesy because Gertrude Franklin asked him to keep her papers for her because she had no place to keep them. Gertrude Franklin, not her daughter, signed that letter. Respondent left that agency in October 1997 and was not permitted to take any records with him. In 2002 Edith Ellis showed her policy to someone at a senior center. Based upon that person's statements she called her sister and told her that their policies were no good. They contacted Respondent who came to their homes and reviewed their policies. He advised Gertrude Franklin that her only options at that point were to pay an additional premium or to reduce the face value of the policy to $400,000 in order to keep it in effect longer. She chose the latter course. Respondent gave Franklin a letter for Nancy Franklin's signature directing the insurance company to reduce the face value of the policy. Franklin, not her daughter, signed the letter and forwarded it to the company. The company reduced the face value based upon that letter which it received on April 1, 2002. That directive allowed the policy to stay in force another two months.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that a final order be entered dismissing the Administrative Complaint filed against Respondent in this cause. DONE AND ENTERED this 28th day of December, 2004, in Tallahassee, Leon County, Florida. S LINDA M. RIGOT 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 28th day of December, 2004. COPIES FURNISHED: James A. Bossart, Esquire Department of Financial Services 612 Larson Building 200 East Gaines Street Tallahassee, Florida 32399-0333 Nancy Wright, Esquire 7274 Michigan Isle Road Lake Worth, Florida 33467 Honorable Tom Gallagher Chief Financial Officer Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300 Pete Dunbar, General Counsel Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300
The Issue Whether Respondent owes $1,568,399.00 or $2,323,765.60 as a penalty for failing to secure workers' compensation insurance for its employees, as required by Florida law.
Findings Of Fact Based on the evidence adduced at hearing, and the record as a whole, the following findings of fact are made to supplement and clarify the sweeping factual stipulations set forth in the parties' June 1, 2005, Joint Stipulation3: Legislative History of the "Penalty Calculation" Provisions of Section 440.107(7), Florida Statutes Since October 1, 2003, the effective date of Chapter 2003-412, Laws of Florida, Section 440.107(7)(d)1., Florida Statutes, has provided as follows: In addition to any penalty, stop-work order, or injunction, the department shall assess against any employer who has failed to secure the payment of compensation as required by this chapter a penalty equal to 1.5 times the amount the employer would have paid in premium when applying approved manual rates to the employer's payroll during periods for which it failed to secure the payment of workers' compensation required by this chapter within the preceding 3-year period or $1,000, whichever is greater. Prior to its being amended by Chapter 2003-412, Laws of Florida, Section 440.107(7), Florida Statutes, read, in pertinent part, as follows: In addition to any penalty, stop-work order, or injunction, the department shall assess against any employer, who has failed to secure the payment of compensation as required by this chapter, a penalty in the following amount: An amount equal to at least the amount that the employer would have paid or up to twice the amount the employer would have paid during periods it illegally failed to secure payment of compensation in the preceding 3-year period based on the employer's payroll during the preceding 3- year period; or One thousand dollars, whichever is greater. The Senate Staff Analysis and Economic Analysis for the senate bill that ultimately became Chapter 2003-412, Laws of Florida, contained the following explanation of the "change" the bill would make to the foregoing "penalty calculation" provisions of Section 440.107(7), Florida Statutes4: The department is required to assess an employer that fails to secure the payment of compensation an amount equal to 1.5 times, rather than 2 times, the amount the employer would have paid in the preceding three years or $1,000, which is greater. There was no mention in the staff analysis of any other "change" to these provisions. The NCCI Basic Manual The National Council on Compensation Insurance, Inc. (NCCI) is a licensed rating organization that makes rate filings in Florida on behalf of workers' compensation insurers (who are bound by these filings if the filings are approved by Florida's Office of Insurance Regulation, unless a "deviation" is permitted pursuant to Section 627.11, Florida Statutes). The NCCI publishes and submits to the Office of Insurance Regulation for approval a Basic Manual that contains standard workers' compensation premium rates for specified payroll code classifications, as well as a methodology for calculating the amount of workers' compensation insurance premiums employers may be charged. This methodology is referred to in the Basic Manual as the "Florida Workers Compensation Premium Algorithm" (Algorithm). According to the Algorithm, the first step in the premium calculating process is to determine the employer's "manual premium," which is accomplished by applying the rates set forth in the manual (or manual rates) to the employer's payroll as follows (for each payroll code classification): "(PAYROLL/100) x RATE)." Adjustments to the "manual premium" are then made, as appropriate, before a final premium is calculated. Among the factors taken into consideration in determining the extent of any such adjustments to the "manual premium" in a particular case are the employer's loss experience, deductible amounts, premium size (with employers who pay "larger premium[s]" entitled to a "Premium Discount"), and, in the case of a "policy that contains one or more contracting classifications," the wages the employer pays its employees in these classifications (with employers "paying their employees a better wage" entitled to a "Contracting Classification Premium Adjustment Program" credit). Petitioner's Construction of the "Penalty Calculation" Provisions of Section 440.107(7), Florida Statutes In discharging its responsibility under Section 440.107(7), Florida Statutes, to assess a penalty "against any employer who has failed to secure the payment of compensation as required," Petitioner has consistently construed the language in the statute, "the amount the employer would have paid," as meaning the aggregate of the "manual premiums" for each applicable payroll code classification, calculated as described in the NCCI Basic Manual. It has done so under both the pre- and post-Chapter 2003-412, Laws of Florida, versions of Section 440.107(7). This construction is incorporated in Petitioner's "Penalty Calculation Worksheet," which Florida Administrative Code Rule 69L-6.027 provides Petitioner "shall use" when "calculating penalties to be assessed against employers pursuant to Section 440.107, F.S." (Florida Administrative Code Rule 69L-6.027 first took effect on December 29, 2004.) Penalty Calculation in the Instant Case In the instant case, "1.5 times the amount the [Respondent] would have paid in premium when applying approved manual rates to [Respondent's] payroll during periods for which it failed to secure the payment of workers' compensation" equals $2,323,765.60.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that Petitioner order Respondent to pay a $2,323,765.60 penalty for failing to secure workers' compensation insurance for its employees. DONE AND ENTERED this 5th day of August, 2005, in Tallahassee, Leon County, Florida. S STUART M. LERNER 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 5th day of August, 2005.
The Issue The issue to be determined is whether Petitioner (“Senior Financial Security”)1/ is entitled to an award of attorney’s fees and costs pursuant to section 57.111, Florida Statutes (2019).2/ Senior Financial Security is entitled to such an award if: (a) the Department of Financial Services’(“the Department”) actions were not substantially justified; or (b) no special circumstances exist that would make an award of fees and costs unjust.
Findings Of Fact Based on the oral and documentary evidence adduced at the final hearing, matters subject to official recognition, the Recommended Order and the Final Order from the underlying proceeding, and the entire record in the instant case, the following Findings of Fact are made: The Parties The Department is the state agency responsible for regulating and licensing insurance agents and agencies. That responsibility includes disciplining licensed agents and agencies for violations of the statutes and rules governing their industry. At all times relevant to the instant case, Jean-Ann Dorrell was a Florida-licensed insurance agent selling fixed annuities and fixed index annuities. She owns Senior Financial Security, a licensed insurance agency located in The Villages, Florida. Ms. Dorrell is not licensed to conduct securities business. The Initiation of the Department’s Investigation At all times relevant to the instant case, Susan Alexander was the regional administrator for the Department’s Jacksonville field office. Prior to becoming a Department employee in 1998, Ms. Alexander had been an insurance agent and financial advisor who held insurance licenses pertaining to life, health, variable annuities, and property and casualty. She also held a Series 6 investment license. At the time of the final hearing in the instant case, she still possessed the aforementioned licenses, but they were “on hold.” On July 1, 2014, Ms. Alexander received a complaint forwarded to her from the Department’s Division of Insurance Fraud. The complaint was from Laura Wipperman who had recently worked for Ms. Dorrell at Senior Financial Security. Ms. Wipperman’s complaint alleged that Ms. Dorrell regularly engaged in the following practices: (a) participating in the sale or delivery of annuities only for new clients, clients with money to move, or existing clients who insisted on meeting with her; (b) giving investment advice without having the necessary licensure; (c) instructing clients to procure reverse mortgages and use the resulting funds to purchase annuities; (d) instructing clients to surrender annuities and replace them with ones that are less suitable for them; and (e) encouraging clients to engage in financially disadvantageous transactions so that Ms. Dorrell would receive commissions. Ms. Wipperman executed an affidavit on July 29, 2014, alleging that Ms. Dorrell had her acting as an agent for Senior Financial Security clients between July of 2010 and March of 2013 despite the fact that she lacked the required licensure. Diana Johnson, another former employee of Senior Financial Security, also provided the Department with an affidavit on July 29, 2014, stating that: I began working for Jean-Ann Dorrell at Senior Financial Security about June of 2010, and I was the receptionist at that time. In the first part of 2013, I was promoted to [] office manager. I do not have and have not been licensed to sell insurance in Florida. . . . When I was promoted to the position of [] office manager, agent Dorrell expanded my duties to include, meeting with clients to review the client’s insurance coverage Agent Dorrell had a motto, “Don’t leave any money on the table.” If a client had an annuity that had a penalty free withdrawal available, I was instructed to contact the client to have them come in for a review. I would then solicit the sale of either another annuity or a life insurance policy and tell the client that funds are available and they will not incur a penalty to withdraw the funds from their policy. If the client made the decision to purchase a policy that I recommended, I would complete the application and have the client sign the paperwork along with the forms to have the funds withdrawn from the existing policy. Agent Dorrell instructed me to explain policies and the benefits. When a policy was issued, I would have the client come to the office and I would deliver the contract to them. . . . I would also answer any questions the client may have [had] about the insurance policy. Many times an appointment was made for agent Dorrell to meet with the client and when the client arrived at the scheduled time, agent Dorrell would make an excuse that she was not able to meet with the client and I was instructed to handle the sale of the policy and then complete the application. I am aware of certain situations where a client passed away and agent Dorrell would have me contact the relatives or beneficiaries to complete the paperwork to receive the death benefits. Agent Dorrell told [me] to sell some type of an insurance policy to the beneficiary using the proceeds from the death benefits. Janet Barbuto was a client who passed away that I remember. I sold an annuity policy to each of her two daughters, Elizabeth Barbuto and Maria Erb, using the proceeds from Janet’s policy. . . . Agent Dorrell would also have me review any client’s brokerage account they may have. Agent Dorrell would have me convince the client to either liquidate their account to cash or transfer the funds to her brokerage house account Agent Dorrell’s ultimate goal is to use funds from the client’s brokerage account to sell the client an annuity or life insurance policy. . . . I have prepared several Lady Bird deeds at the instruction of agent Dorrell. . . . I have taken several insurance company product training classes online for agent Dorrell. Agent Dorrell would send an email to me instructing me to take a particular product training course online. I would log onto the company’s website as agent Dorrell and complete the training course. Agent Dorrell would consistently berate me for not selling life insurance policies because the client would not want to purchase one after I had asked the client if they would be interested in a policy. Agent Dorrell told me that the client does not know what they want and that I needed to learn how to sell policies. Agent Dorrell would say that if I did not learn how to sell, our door would not be open if all the clients said no to my recommendations. Matthew Plunkitt, another former employee of Ms. Dorrell, executed the following affidavit on December 11, 2014: During the time that I worked in agent Dorrell’s office there were a number of issues and regular business practices which made me decide to find a new job. . . . I sat in on several appointments at agent Dorrell’s direction where she would tell the consumer that they should be concerned about the stock market, that a stock market correction was coming, that they were going to lose a lot of money, and that they needed to get out of the market right away. Agent Dorrell was absolutely talking about investments which I knew that she was not licensed to talk to the consumer about. Agent Dorrell would then suggest that if the consumer would transfer their account to Van Guard Capital, the funds could then be turned into cash to purchase annuities, which would make the money safe and the consumer would not lose anything when the market made the correction which was coming. . . . When new clients would come into the office, agent Dorrell would sit with them for usually the first two appointments. Afterwards clients would then meet with usually Diana Johnson, the office manager and sometimes myself. Agent Dorrell was not in the office often, so Diana Johnson, as the office manager was required to handle everything in agent Dorrell’s absence. . . . I remember that on the appointments that I sat in on, everyone was sold an income rider on their annuity whether it was necessary or not. I do not know what the reasoning was behind the rider. . . . Being employed in agent Dorrell’s office was extremely stressful and she was frequently verbally abusive to her staff, threatening to fire them for not following her exact instructions. When objections would be raised about her instructions or office procedure, they would be told that we need to listen to her and not the clients or the insurance companies or the rules. I can’t remember the name of the client, but I remember that at one point she instructed me to pretend to be someone’s grandson to get the information she needed on a stock account. Her attitude made it impossible to discuss many of the issues in the office with her. Ms. Alexander supervised Ruth Williams, the Department’s lead investigator for this matter. Prior to her employment with the Department, Ms. Williams spent 10 years in the insurance industry and had acquired life insurance, health insurance, and variable annuity licenses. She also dealt with indexed annuities. The investigation of Ms. Dorrell was assigned to Ms. Williams, and Ms. Alexander received regular updates on the status of Ms. Williams’s investigation. At the close of a typical investigation, Ms. Alexander would review the evidence and the investigator’s recommendation. She could then decide that a case should be closed without any disciplinary action or that the case should be forwarded to the Legal Processing Unit in Tallahassee for an assessment of the allegations and evidence. If the Legal Processing Unit did not close the case, then the case would be forwarded to the Department’s General Counsel’s Office. Count I – Frederic Gilpin Frederic Gilpin was born in 1940 and worked in the automobile industry, primarily as a service manager in dealerships, for 44 years before retiring in 2006. Mr. Gilpin purchased a Prudential variable annuity in 2006 through Bryan Harris, an investment advisor in Maryland, for $260,851.14. On December 31, 2008, Mr. Gilpin’s Prudential variable annuity was worth only $200,989.32. By March 31, 2009, its value had fallen to $183,217.37. The decrease in the annuity’s underlying value coincided with the precipitous declines experienced by the stock market in 2008 and 2009. On May 1, 2009, Mr. Gilpin exercised a rider in the Prudential annuity contract that guaranteed a yearly income of $15,625.00. That annual income would continue for the rest of his life regardless of the stock market’s performance. The guaranteed income stream would only be destroyed if Mr. Gilpin withdrew from the annuity’s principal. Mr. Gilpin and his wife met with Ms. Dorrell in 2012 to discuss their financial situation. As recommended by Ms. Dorrell, Mr. Gilpin surrendered the Prudential annuity and used the proceeds to purchase a fixed index Security Benefit annuity. The purchase price of approximately $205,000.00 for the Security Benefit annuity was allocated between two accounts whose performance was tied to the Standard and Poor’s 500. Ms. Alexander obtained a letter that Mr. Gilpin wrote to Security Benefit on April 22, 2013, asking that the aforementioned purchase be rescinded: Please accept this letter as indication that I would like my annuity that was rolled over from Prudential and into Security Benefit on January 4th, 2013 rescinded and put back into the contract that we rolled it over from. . . . My agent, Jean Dorrell misrepresented the facts and did not disclose to me the guarantee that I would be giving up when I moved the money over. . . . I put my trust in Ms. Dorrell, and I believe that she did not do what was in my best interest and was simply looking to get paid by moving my annuity contract over. She listed in a letter to me that I was paying $15,000 per year in fees, as a big reason why I should move the money. I have since discovered that was a gross overstatement of the fees that I was paying in my Prudential contract. Upon closer examination, it looks more like my fees were closer to $7,000 per year, not $15,000 and my Management and Expense fee was set to drop from 1.65% to 0.65% when I hit my 10 year marker in 2016 (also not disclosed by Jean). I also paid a $13,077 surrender charge when I moved the contract. Jean told me not to worry about it because with the 8% bonus it would offset the fee that I was paying to move the money. While it appears that this is true, she didn’t take into consideration that I now am in a new contract with a new 10 year surrender charge both on my contract and the bonus I received with not as much liquidity on my money after the move. Probably the most egregious representation is that she stated to me that the old Prudential contract had no guarantees, and I have since come to understand that I had a very valuable lifetime income guarantee that gave me protected income for life based on a protected income base of $312,513.80, which guaranteed lifetime income of $15,625.69. . . . Now that I have moved the funds over, I have forfeited that guarantee. . . . The Department’s April 25, 2017, Administrative Complaint alleged that Ms. Dorrell violated multiple provisions of the Florida Insurance Code and the Florida Administrative Code by using misleading and/or false assertions to induce Mr. Gilpin to purchase an unsuitable annuity. The Findings of Fact from the Recommended Order demonstrate that the Department had valid reasons to question the suitability of the Security Benefit annuity. At the time of the exchange, the Prudential annuity only had four more years of surrender charges, and Mr. Gilpin started a new 10-year period of surrender charges with the Security Benefit annuity. Mr. Gilpin incurred a surrender charge of $13,077.56 for surrendering the Prudential annuity. While that surrender charge was more than offset by an eight percent bonus (i.e., $16,000.00) he earned by purchasing the Security Benefit annuity, that eight percent bonus was subject to recapture for the first six years. The Security Benefit annuity had a 100- percent participation rate, and a seven percent roll-up rate. In contrast, the Prudential annuity only offered a five percent roll-up rate. Also, Mr. Gilpin and his wife experienced significant health issues during the relevant time period and were fortunate to be well-insured. However, they would have likely incurred substantial penalties if they had been forced to use funds from the relatively illiquid Security Benefit annuity to finance their treatment. In addition, moving Mr. Gilpin’s funds from a variable Prudential annuity to the fixed index Security Benefit annuity cost Mr. Gilpin when the stock market rebounded from the lows of the most recent recession. Finally, a significant factor in assessing the suitability of the two annuities was whether Mr. Gilpin destroyed his guaranteed lifetime income stream of $15,625.69 by taking an excess withdrawal from the Prudential annuity. If he had not, then it becomes much easier to argue that the Security Benefit annuity was not a suitable replacement for the Prudential annuity. At the time it issued the Administrative Complaint, the Department possessed statements from Prudential indicating that Mr. Gilpin’s guaranteed income stream was intact as late as September 30, 2012. However, Mr. Gilpin’s hearing testimony, his 2010 and 2011 income tax returns, and Ms. Dorrell’s testimony called that into question. While the totality of the evidence presented at the final hearing did not clearly and convincingly demonstrate that Ms. Dorrell committed the violations alleged in Count I, Mr. Gilpin’s letter to Prudential, the Prudential statements, and a comparison of the Prudential and Security Benefit annuities provided the Department with a reasonable basis for pursuing Count I. This analysis is further discussed in paragraphs 81 through 84 in the Conclusions of Law. Counts II and III – Elizabeth Barbuto and Maria Erb Elizabeth Barbuto executed the following affidavit on November 10, 2014: My mom, Janet Barbuto passed away on April 16, 2014. My aunt, Marlene Brisco and my mom were both clients of agent Jean Ann Dorrell and Senior Financial Security. After the funeral, my aunt, Marlene Brisco, set up an appointment for my sister Maria Erb and me to meet with agent Dorrell to review my mom’s investments with agent Dorrell. When we got to the appointment, Diana Johnson and Matthew Plunkitt were waiting to meet with us. Agent Dorrell came in for a few moments and then left to meet with other clients. When I went into this appointment, I did not realize that I would be making any major decisions that day. I thought that I was going over my mom’s things, and that I would have time to make any major decisions afterwards. In the meeting, I was sitting next to Matthew and my sister Maria was sitting next to Diana. Diana did the majority of the talking. If there was something that I didn’t understand or needed to read Matthew would help me out, but he did not really explain anything about what we were seeing or signing. I remember filling out a form which appeared to be a new client form, asking about my risk tolerance and things. I thought that I would be signing some paperwork to have Mom’s policies placed into my name. Instead I now know that the paperwork, which Diana already had prepared, was paperwork to have new annuity contract[s] issued in my name, not transferring the contracts mom had [set] up into my name. The only thing I remember is that I was told that I would need to keep one for 10 years. I believe that one of the policies was placed with Athene and one was placed with Equitrust. I received a huge packet from Athene, but by the time that I opened it, it was too late to free look the policy. Since that time, I have paid more attention and have spoken to a family friend and financial advisor, David Hodge, who explained to me that I could have made different choices with my inheritance. In looking back on that day, I was still grieving the loss of my mother and cannot believe that paperwork was already prepared to move my financial future without anyone ever having talked with me beforehand to see what I was thinking about doing. At the Department’s request, EquiTrust and Athene offered refunds to Ms. Barbuto. Ms. Erb executed an affidavit on October 30, 2014, that mirrored her sister’s: My mom, Janet Barbuto, passed away in Florida in April, 2014. She was a client of agent Jean Ann Dorrell’s. While I was in Florida a few days after my mom’s passing, my sister Elizabeth Barbuto and I went to agent Dorrell’s office to discuss my mom’s estate. We had a meeting with two people, Diana and Matthew. I do not know either of their last names. Diana did most of the talking. Matthew did not say much. She explained to us that Mom had several Roth and IRA accounts. At sometime during that meeting agent Dorrell came into the office, talked for a few minutes, offered her sympathy, and then left. Agent Dorrell did not discuss any of the policies or accounts with us. Shortly after that one meeting, I returned to Oregon and haven’t been back to Florida to see agent Dorrell since. I think at that first meeting, I may have signed some papers, but I was still in shock, so I am not sure what I signed. At that point, the office of agent Dorrell emailed me some documents to be signed. I know that Mom’s two IRA’s needed to have mandatory withdrawals taken from them, before we could proceed with anything else. Most of Mom’s annuities were with American Equity and I remember at some point either Diana or Matthew informed me that American Equity did not do inherited IRA annuities for people who lived outside Florida, so it would be necessary for me to place my inheritance with another company. My sister is a Florida resident so this problem did not pertain to her. I am not sure if my sister is doing business with agent Dorrell’s office or not. I did receive two packages with contracts from agent Dorrell’s office and I signed where I was instructed to sign and returned everything to the office as instructed. The annuity policies which agent Dorrell selected for me were with Athene. After thinking about it, I contacted my financial planner in Pennsylvania, and found out that the paperwork I had signed was for a 10 year annuity, which I did not want to keep. A portion of Diana Johnson’s July 29, 2014, affidavit corroborated the affidavits from Ms. Barbuto and Ms. Erb: I am aware of certain situations where a client passed away and agent Dorrell would have me contact the relatives or beneficiaries to complete the paperwork to receive the death benefits. Agent Dorrell told [me] to sell some type of an insurance policy to the beneficiary using the proceeds from the death benefits. Janet Barbuto was a client who passed away that I remember. I sold an annuity policy to each of her two daughters, Elizabeth Barbuto and Maria Erb, using the proceeds from Janet’s policy. Counts II and III of the Department’s Administrative Complaint alleged that Ms. Dorrell violated the Florida Insurance Code and the Florida Administrative Code by: (a) directing an unlicensed person, Diana Johnson, to sell annuities to Ms. Barbuto and Ms. Erb; (b) failing to perform any insurance agent services for Ms. Barbuto’s transactions; falsely informing Ms. Barbuto that it was necessary to exchange her late mother’s IRA contracts for new financial instruments so that Ms. Dorrell could obtain a commission; and falsely stating to Ms. Erb that her non-Florida residency made it necessary for her mother’s IRA contracts to be liquidated with the resulting funds being used to purchase an annuity from Athene. The Department noted in the pre-hearing stipulation submitted prior to the final hearing in the underlying case that it would be dropping Counts II and III. Nevertheless, the affidavits from Ms. Barbuto, Ms. Erb, and Ms. Johnson provided a reasonable basis to support the Department’s allegation that Ms. Dorrell utilized unlicensed personnel to sell annuities. Ms. Johnson’s affidavit described how she would engage in the unlicensed sale of insurance products, and she specifically named Ms. Barbuto and Ms. Erb as examples of how Ms. Dorrell instructed her to sell products to the beneficiaries of death benefits. As explained in paragraphs 85 and 86, under the Conclusions of Law, the Department’s action against Petitioner as set forth in Counts II and III was, at the time that action was taken, substantially justified. Count IV – Deborah Gartner’s Annuities At the time of the final hearing in the underlying case, Deborah Gartner was a 71-year-old widow who met Ms. Dorrell at a Senior Financial Security seminar in 2007. Ms. Gartner filled out a form indicating that her net worth was between $500,000.00 and $1 million. In January of 2008, Ms. Gartner met with Ms. Dorrell in order to seek financial advice. Ms. Gartner had $201,344.14 in a Guardian Trust account and $195,182.44 in a Guardian Trust IRA. In addition, Ms. Gartner owned an $80,000.00 certificate of deposit. On a monthly basis, Ms. Gartner was receiving $1,381.00 from social security, $786.15 from a pension, and $4,500.00 from investment withdrawals. The latter came from depleting principal rather than interest. At the time of the January 2008 meeting, the stock market was declining, and Ms. Gartner was adamant about getting out of equities. Ms. Dorrell told Ms. Gartner that annuities would be appropriate if she was interested in principal protection and guaranteed income. Because she lacked a securities license, Ms. Dorrell could not legally recommend or instruct Ms. Gartner to liquidate her equity investments. On June 24, 2014, Ms. Gartner requested assistance from “Seniors vs. Crime,” a special project of the Florida Attorney General. Jon Hartman handled her case, and Mr. Hartman had extensive experience in finance. For example, he previously worked as the director of investments for the K-Mart Corporation’s pension savings plan and managed approximately $2 billion in assets. After leaving K-Mart, Mr. Hartman worked as the chief financial officer for a retail telecommunications company. His last position, prior to retiring from full-time employment, involved advising high net worth individuals on their investments. While Mr. Hartman has never sold insurance or held a brokerage license, he is a chartered financial analyst, and he described that credential as “the gold standard for people who wish to manage money on a professional level.” His November 20, 2014, investigative report from “Seniors vs. Crime” states that on December 31, 2007, Ms. Gartner had $394,814 invested in relatively liquid assets such as stock mutual funds, a short term bonds, and one or more money market funds. The report suggests that Ms. Dorrell arranged for the vast majority of the aforementioned money to be transferred into relatively illiquid annuities. The following paragraph from the report questions the wisdom behind transferring Ms. Gartner’s funds to annuities and whether subsequent annuity purchases enriched Ms. Dorrell at the expense of excessively limiting Ms. Gartner’s liquidity: While some investments in annuities may be appropriate, prudent financial management does not recommend that anyone place 90+% of their investable assets in annuities or any other single investment. All investors should maintain a well-diversified portfolio based upon their risk tolerances and liquidity needs. Further, we are troubled by the fact that annuities typically carry high commission rates for agents. Information that we obtained from the insurance company web sites indicates that the commission rates for these types of annuities are 7-9%. . . . Further, we are curious to know the reasoning behind the transfer of the Reliance Standard annuities to different insurance companies [in] 2011. It appears that these transactions were motivated by additional commissions for Ms. Dorrell. It is our understanding that the current surrender charge for the two Allianz MasterDex 10 contracts is 7.50%, decreasing by 1.25% per year. The surrender charge will not drop to zero until February, 2019. For the two American Equity contracts, the current surrender charge is 16% and will not drop to zero until February, 2024. However, withdrawals limited to 10% annually from Allianz and American Equity may be taken without incurring a surrender charge on the anniversary date of the policies. Thus, the annuities severely restrict Ms. Gartner’s liquidity position. One of the conclusions in Mr. Hartman’s report stated that: It is our opinion that Ms. Dorrell “churned” Ms. Gartner’s investment portfolio for her benefit to earn commission income. As evidenced by the Guardian Trust statements as of December 31, 2007, Ms. Gartner had two different accounts totaling $394,814 that were invested approximately two-thirds in different equity mutual funds and the remaining one-third in short bond funds and money market funds. As stated on page 2 of this report, it is our opinion that no reputable financial advisor would place 90% or more of any client’s assets in any single investment vehicle. Ms. Gartner executed an affidavit on October 7, 2014, indicating that she completely relied on Ms. Dorrell to manage her finances after her husband’s death: To the best of my knowledge, everything that my husband had set up was in the stock market. Most of the funds were in IRA’s in his name. Nothing was in my name until he passed away. After Agent Dorrell had my portfolio transferred, everything was placed into Van Guard Capital Account number 5XG- 153754. . . . When I did meet with Agent Dorrell in the beginning when the accounts were fresh, Agent Dorrell would get out her chalkboard and explain and [] I didn’t understand what she was talking about, but it sounded good. So I would do what Agent Dorrell suggested. I trusted her like she was my sister, and so whatever Agent Dorrell suggested, I would go along with. I had no reason to question what was happening with my accounts. I was getting a monthly allowance of $2500.00 and I thought everything was fine. . . . Pretty soon, after I had some questions, and I would make an appointment with Agent Dorrell, and in would walk Goldie and she would take over. This went on for about two years. It was always Goldie. I’m not sure where the money was coming from. I am assuming that the money came from one of my annuities or my other accounts. I trusted Agent Dorrell to take care of everything and Goldie and Diana worked for her. They were getting instructions from Agent Dorrell on my behalf. In Count IV of the Administrative Complaint, the Department alleged that Ms. Dorrell: (a) operated without a brokerage registration and gave investment advice that led to the depletion of Ms. Gartner’s funds via the conversion of liquid brokerage assets into illiquid annuities; (b) recommended the liquidation of an annuity that caused Ms. Gartner to incur a substantial loss due to surrender charges; and (c) falsified information on annuity application forms. Thus, the Department accused Ms. Dorrell of violating the Florida Insurance Code and the Florida Administrative Code by disseminating false information and by demonstrating a lack of trustworthiness and expertise. Ms. Gartner’s assertions about how she relied on Ms. Dorrell to manage her money corroborated the portion of Mr. Plunkitt’s affidavit in which he stated that Ms. Dorrell gave investment advice without having the proper licensure. While the Recommended Order from the underlying proceeding indicates that the allegation that Ms. Dorrell gave investment advice turned on a credibility determination, the affidavits from Ms. Gartner and Mr. Plunkitt provided a reasonable basis for Count IV. Also, the report from “Seniors vs. Crime” presented a solid basis for concluding that Ms. Dorrell had mishandled Ms. Gartner’s funds. The substantial justification for pursuing Count IV is discussed further in paragraphs 87 through 89, under the Conclusions of Law. Count V – Deborah Gartner’s Real Estate Transactions Ms. Gartner and Ms. Dorrell became friends, and Ms. Gartner sought Ms. Dorrell’s advice in 2012 about selling her home in Summerfield, Florida. At that time, Ms. Gartner wanted to acquire a smaller home in The Villages, Florida. However, Ms. Gartner was having difficulty selling the Summerfield home. Along with referring Ms. Gartner to a real estate agent, Ms. Dorrell allegedly advised her to stop paying the mortgage on her Summerfield home and to do a short sale. Ms. Gartner and Ms. Dorrell informally agreed that Ms. Gartner would select a house in The Villages, Ms. Dorrell would purchase it, and Ms. Gartner would then buy the house from her. Ms. Dorrell made the initial purchase because Ms. Gartner lacked funds and/or a good credit rating following the short sale. Ms. Gartner and Ms. Dorrell discussed Ms. Gartner purchasing the villa from Ms. Dorrell, but they never reached a formal agreement on terms. Because a short sale would have a negative impact on her credit rating, Ms. Dorrell allegedly advised Ms. Gartner to buy a new car prior to executing the short sale. Ms. Gartner sold her 2003 Mazda Tribute to Ms. Dorrell for $10,000.00, and Ms. Gartner purchased a new car. Ms. Gartner selected a villa in The Villages, and Ms. Dorrell purchased it for $229,310.78 on November 1, 2012. Of the aforementioned amount, Ms. Gartner paid $10,000.00 and Ms. Dorrell paid the remaining $219,310.78. At this point in time, Ms. Dorrell was the legal owner of the villa. Ms. Gartner could not move into the villa immediately after the sale because it was being rented, and the tenants’ lease extended through April of 2013. Ms. Dorrell received the rental payments of $1,800.00 per month and paid the expenses associated with the villa between November of 2012 and April of 2013. Those expenses included items such as home insurance, cable television, lawn maintenance, and utilities. By May of 2013, Ms. Gartner had completed a short sale of her Summerfield home. She received a short sale benefit of $36,775.00 and a seller assistance payment of $3,000.00. Ms. Gartner moved into the villa in May of 2013. At that point in time, there was no formal agreement between Ms. Gartner and Ms. Dorrell about when Ms. Dorrell would sell the villa to Ms. Gartner or how Ms. Gartner would pay Ms. Dorrell for it. Ms. Gartner paid no rent to Ms. Dorrell from May of 2013 through April of 2014. In November of 2014, Ms. Dorrell sold the villa to Ms. Gartner for approximately $219,000.00, the same price that Ms. Dorrell had paid for it. In order to finance the sale, Ms. Gartner executed a promissory note that would pay Ms. Dorrell $100,000.00 with four percent interest. Ms. Dorrell did not record that promissory note. In order to finance the remainder of the purchase price, Ms. Gartner obtained a reverse mortgage. Ms. Gartner stated in her October 7, 2014, affidavit that “all of a sudden I received paperwork from Agent Dorrell stating that I owed her all kinds of money and if I did not pay up she could take my home.” Mr. Hartman’s report also covered the aforementioned transactions and reached the following conclusions: It is our opinion that Ms. Dorrell gave Ms. Gartner very poor investment advice in that she convinced Ms. Gartner to enter into a short sale without investigating other alternatives. Second, Ms. Dorrell either kept very poor records or deliberately kept Ms. Gartner “in the dark” regarding her financial obligations. Third, Ms. Dorrell did not formulate a reasonable exit strategy for Ms. Gartner to pay off her obligations to Ms. Dorrell. Apparently, her strategy was to force Ms. Gartner into applying for a reverse mortgage, using those proceeds to pay off the promissory note, and then get the rest of her money from Ms. Gartner’s IRA account [when] Ms. Gartner turned 70 and ½. That strategy would have a negative impact on Ms. Gartner’s income tax situation as it would increase her adjusted gross income, making her social security payments 85% taxable. It is our opinion that Ms. Dorrell has willfully and deliberately overstated her claims for monies due from Ms. Gartner. Further, we documented that Ms. Dorrell was not being truthful with us regarding her relationship with Ms. Gartner during our meeting on August 14, 2014. The true amount of the financial obligation that Ms. Gartner has to Ms. Dorrell is unknown. Ms. Gartner had signed a promissory note for $100,000. Beyond that, some amount is due Ms. Dorrell. However, we do not have sufficient information to make an accurate determination of the additional amount due. The Department’s Administrative Complaint alleged that Ms. Dorrell committed several wrongful acts such as: (a) advising Ms. Gartner to stop making mortgage payments on the Summerfield home; (b) arranging for the purchase of the villa and accepting a $10,000.00 deposit from Ms. Gartner without giving her credit for that payment; (c) failing to record the promissory note; and (d) pressuring Ms. Gartner to apply for a reverse mortgage and arranging to obtain the balance from Ms. Gartner’s IRA account in order to pay off the promissory note. According to the Department, the aforementioned allegations amounted to a violation of Florida Administrative Code Rule 69B-215.210 which declares that all life insurance agents must always place the policyholder’s interests first. The Department also concluded that the aforementioned allegations demonstrated a lack of trustworthiness to engage in the business of selling insurance. Ms. Gartner’s affidavit along with the report from “Seniors vs. Crime” provided a reasonable basis for the Department to pursue the allegations under Count V. The substantial justification for pursuing Count V is discussed further in paragraphs 90 and 91 under the Conclusions of Law. Count VI – Earl Doughman Earl Doughman was born in 1934 and was a client of Ms. Dorrell’s. He wrote the following letter to the Security Benefit Life Insurance Company on April 14, 2014: This letter is to file a formal complaint concerning the Total Value Annuity dated 9/30/2013. Jean A. Dorrell is the listed agent on my annuity. After a recent phone call to [acquire] information regarding my annuity, I discovered that I was extremely misled and all the important details of this contract were never disclosed to me. This links to Elder Financial Abuse. Jean A. Dorrell was never present during the presentation and sale of my annuity. Jean A. Dorrell was not present during the delivery of my annuity. Jean A. Dorrell never witnessed any process involved with my annuity. Diane Johnson did everything involved with the sale, presentation and delivery of my annuity. Why is Jean A. Dorrell the listed agent on my contract? Why did Jean A. Dorrell sign as agent on 8/28/2013? I never saw Jean A. Dorrell on 8/28/2013. I thought Diane Johnson was my agent. During the presentation, I asked Diane Johnson, “Why should I move from Midland National? Midland is paying me 3% guaranteed fixed interest.” Diane told me, “You are going from 3% to 4%.” Diane NEVER disclosed to me that this is a Rider with an ANNUAL initial charge of 0.95% and maximum charge of 1.80%. Diane presented the 4% interest as fixed guaranteed. This makes me very upset! The initial current interest rate is 1.5% with the Security Benefit Total Value Annuity. As I mentioned before, my Midland National annuity was earning 3% guaranteed. Also, the cap on my index with Midland was 5.25%. The cap with the Total Value Annuity is only 3.25%. This is not a good replacement from an annuity to annuity. Selling the Total Value Annuity to me was never suitable. This appears to be illegal and is definitely Elder Financial Abuse. It is my hope that this contract be terminated and my initial Purchase Payment of $29,492.30 be paid out immediately, with no penalties, because I was misled into purchasing this contract under false details regarding the Total Value Annuity. Security Benefit responded to Mr. Doughman’s letter on May 13, 2014, by notifying him that it would cancel the contract and refund the purchase price. The Department’s Administrative Complaint alleged that Ms. Dorrell violated numerous provisions governing insurance agents by having an unlicensed employee sell an unsuitable annuity to Mr. Doughman. Mr. Doughman’s letter describing how an unlicensed employee, Diana Johnson, sold him an annuity corroborated the affidavits of former employees of Senior Financial Security as to how Ms. Dorrell facilitated unlicensed activities. The aforementioned documents were a reasonable basis for pursuing Count VI, and the substantial justification for pursuing Count VI is discussed further in paragraph 92 under the Conclusions of Law. Count VII – Margaret Dial Margaret Dial was born in 1950. Ms. Dial met Ms. Dorrell in July of 2007 and purchased multiple annuities from her. One of those annuities was an Old Mutual annuity that she purchased on November 11, 2007. In 2013, Ms. Dorrell advised Ms. Dial to surrender the Old Mutual annuity and use the proceeds to purchase a Security Benefit annuity. After incurring $16,560.39 in surrender charges, Ms. Dial received $129,901.21 in the form of a check mailed to her home. On March 12, 2013, Ms. Dial signed an application to purchase the Security Benefit annuity recommended by Ms. Dorrell for $130,000.00. The application associated with the Security Benefit annuity was incorrect because it did not show that it was a replacement for the Old Mutual annuity. Ms. Dial’s surrender of the Old Mutual annuity and purchase of the Security Benefit annuity was problematic for multiple reasons. For instance, Ms. Dorrell sold the Old Mutual annuity to Ms. Dial and then encouraged her to surrender it and use the proceeds to acquire the Security Benefit annuity. In effect, Ms. Dorrell earned two commissions on the same money. Also, the manner in which the Security Benefit annuity was purchased could have potentially prevented Old Mutual from engaging in conservation efforts. “Conservation” is the term used to describe an insurance company’s effort to retain existing business. Ms. Dial filed a complaint with Security Benefit in April of 2016 stating that “Jean Dorrell had me CLOSE the account to transfer my monies with a great LOSS to Security Benefit.” Security Benefit responded with a June 8, 2016, letter offering to cancel the Security Benefit annuity and return Ms. Dial’s purchase payment. Security Benefit then issued the following letter to Ms. Dorrell on June 20, 2016: Security Benefit Life Insurance Company (“Security Benefit”) recently received and addressed a complaint from Margaret Dial, to whom you presented a Secure Income Annuity for sale in 2013. As part of our investigation, Security Benefit directed that you provide a statement addressing the complaint, which you furnished through your attorney. In the course of investigating Ms. Dial’s complaint, Security Benefit learned that despite the application and Annuity Suitability form for the Contract indicating otherwise, Ms. Dial’s purchase of the Contract had in fact involved the replacement of an existing annuity contract she owned (said contract was issued by Fidelity & Guaranty Life Insurance Company). Your statement indicated that the transaction was not disclosed to Security Benefit as a replacement due to clerical error on the part of your office staff. As you should know, the proper handling of proposed annuity replacements is a continuing focus of insurance regulators, including the Florida Office of Insurance Regulation. As such, the failure to disclose that a replacement will occur is a very serious matter and one that Security Benefit does not take lightly whether due to clerical error or otherwise. By this letter, Security Benefit is notifying you that any further failure to disclose replacement activity will result in the termination of your appointment and the enforcement of any other remedies available to Security Benefit under the terms of your Producer Agreement. (emphasis added) The Department’s Administrative Complaint generally alleged that Ms. Dorrell violated several governing statutes by transmitting false information and displaying a lack of trustworthiness. In addition to the fact that Ms. Dorrell had admitted to Security Benefit that she had failed to disclose the source of the funds that would be used to purchase the annuity, the Department knew that Ms. Wipperman had specifically named Ms. Dial as a client who had been misinformed about the amount of their surrender charges. That information provided a reasonable basis for pursuing Count VII against Ms. Dorrell. The substantial justification for pursuing Count VII is discussed further in paragraphs 93 and 94 under the Conclusions of Law. Count VIII – Unlicensed Activities The Department alleged under Count VIII of the Administrative Complaint that Ms. Dorrell and/or her employees performed work without having the proper licensure. Specifically, the Department alleged that Ms. Dorrell’s employees wrote Lady Bird deeds3/ and wills without being licensed attorneys. The Department also alleged that Ms. Dorrell and/or her employees encouraged clients to liquidate security holdings without being licensed investment professionals. The affidavits from Laura Wipperman, Diana Johnson, and Matthew Plunkitt provided a reasonable basis for the Department to pursue Count VIII. The substantial justification for pursuing Count VIII is discussed further in paragraphs 95 through 100 under the Conclusions of Law. Count IX – Performance of Unlicensed Insurance Activities The Department alleged in Count IX that Ms. Dorrell had Ms. Wipperman and Ms. Johnson perform acts that could only be performed by a licensed insurance agent. Those allegations were reasonably supported by the affidavits of Ms. Wipperman, Ms. Johnson, and Mr. Plunkitt. The substantial justification for pursuing Count IX is discussed further in paragraph 101 under the Conclusions of Law. Count X – Failure to Report Administrative Actions The Department dismissed Count X, but alleged in the Administrative Complaint that Ms. Dorrell violated Florida Law by failing to report to the Department two administrative actions taken against her by the states of Nevada and Wisconsin. This allegation was supported by a March 14, 2008, letter from Ms. Dorrell to Reliance Standard Life Insurance Company. That letter provided a reasonable basis for pursuing Count X, and the substantial justification for pursuing Count X is discussed further in paragraphs 102 and 103 under the Conclusions of Law.
The Issue Whether the Department has the authority pursuant to Section 627.062(2)(g), Florida Statutes, to disapprove Petitioner's Custom Homeowners' rates currently in effect throughout the State of Florida as "inadequate" in Zones I, II and III, and as "excessive" in Zone IV. If so, are Petitioner's Custom Homeowners' rates currently in effect throughout the State of Florida "inadequate" in Zones I, II and III, and "excessive" in Zone IV.
Findings Of Fact The Parties. Petitioner, Fortune Insurance Company (hereinafter referred to as "Fortune"), possesses a certificate of authority to conduct insurance business in Florida. Fortune engages in the business of writing homeowners insurance throughout Florida. Fortune's business offices are located in Jacksonville, Florida. Respondent, the Florida Department of Insurance (hereinafter referred to as the "Department"), is an agency of the State of Florida charged with the responsibility for, among other things, regulating rates charged for homeowners insurance in Florida. Fortune's Current Rates. In 1985 Fortune sought approval of homeowners insurance rates to be charged by it in four geographic zones it has divided Florida into. See Petitioner's exhibit 7. Fortune did not make any material misrepresentation in its filing. (Stipulated Fact). Nor was there any material error in Fortune's filing. (Stipulated Fact). The Department reviewed and approved Fortune's Custom Homeowners Program, "HO-8", insurance rates in January of 1986. (Stipulated Fact). The Department approved the following rates: a. Zone I: $387.00 Zone II: $389.00 Zone III: $332.00 Zone IV: $655.00 Zone IV includes, among other counties, all of the counties in the northern portion of Florida, including the Panhandle. No modification of Fortune's HO-8 rates was requested by Fortune between January of 1986 and June of 1993. Fortune's 1993 Request for a Rate Increase. On or about June 11, 1993 Fortune filed Petitioner's exhibit 1 with the Department requesting approval on an increase in rates pursuant to Section 627.062(2)(a)1., Florida Statutes. (Stipulated Fact). Fortune sought approval from the Department for an HO-8 rate increase for Zone I (to $443.00), Zone II (to $445.00) and Zone III (to $380.00). No HO-8 rate increase was requested by Fortune for Zone IV. Fortune suggested in the June 11, 1993 rate increase request (hereinafter referred to as the "1993 Request"), that it was requesting a statewide increase of 14.5 percent. The statewide increase sought actually amounted to a 12.9 percent increase. The parties communicated about the 1993 Request through the remainder of 1993. (Stipulated Fact). On January 25, 1994, the Department provided Petitioners exhibit 2 to Fortune proposing base rates for all four zones of Fortune's Custom Homeowners Program. (Stipulated Fact). The Department proposed to accept a statewide increase of 8.9 percent. This weighted average for the four zones included increases for Zones I, II and III and a decrease of approximately 49.9 percent for Zone IV. Fortune disagreed with the Department's determination. Therefore, Fortune withdrew the 1993 Request by letter dated February 18, 1994. (Stipulated Fact). Petitioner's exhibit 3. By letter dated March 7, 1994 the Department accepted the withdrawal of the 1993 Request. (Stipulated Fact). The Department informed Fortune that the withdrawal was "equivalent to the filing never having been submitted." Petitioner's exhibit 4. The Department's Notice to Fortune that Fortune's Rates are Excessive and/or Inadequate and Fortune's Response. Based upon the Department's review of the 1993 Request, the Department concluded that Fortune's HO-8 rates for Zones I, II and III were inadequate and that Fortune's HO-8 rate for Zone IV was excessive. By letter dated March 8, 1994, the Department informed Fortune, in part, of the following: You are hereby notified that pursuant to the provision of Section [627.062(2)(g)] the Department has reviewed the current rates, rating schedule, and rating manual for your Custom Homeowners Program and finds on a preliminary basis that certain rates are excessive and certain rates are inadequate. (Stipulated Fact). Petitioner's exhibit 5. The Department also informed Fortune in the March 8, 1994 letter that it would be given the opportunity to prove to the Department that "your current rates are not excessive, inadequate or unfairly discriminatory." The Department also informed Fortune in the March 8, 1994 letter that Section 627.062, Florida Statutes, provides that Fortune "shall, within sixty days of the date of this Notice, file with the Department all information which you believe proves the reasonableness, adequacy and fairness of your current rates." The Department also informed Fortune in the March 8, 1994 letter that it had the right to request a hearing pursuant to Chapter 120, Florida Statutes. The Department closed the March 8, 1994 letter with the following: If you request a hearing but intend to submit additional information within the allotted 60-day period you may request that the transmittal of your hearing request be delayed until the Department has had an opportunity to review the additional information submitted. Fortune did not provide additional information to the Department within sixty days of the Department's March 8, 1994 letter. On or about March 21, 1994 Fortune mailed a petition to the Department requesting a formal administrative hearing pursuant to Section 120.57, Florida Statutes. Prior to the March 8, 1994 letter from the Department, Fortune had provided all relevant information it had concerning its rates to the Department. Fortune, through Mr. Scourtis, verbally informed the Department that Fortune had no further information to support its rates. The evidence failed to prove that, between March 8, 1994 and March 21, 1994 when Fortune mailed its request for formal administrative hearing, Fortune had any other information concerning its rates which it had not provided the Department. The evidence also failed to prove that after March 21, 1994, when Fortune's request for formal hearing was mailed, the Department unsuccessfully attempted to obtain any information from Fortune through discovery. The Department's Review of Fortune's Rates. In determining whether Fortune's rates were inadequate or excessive, the Department first determined that a "credibility ballast" equal to the annual trend factor, or 4 percent, was generally accepted and reasonable actuarial technique. Fortune failed to prove that the use of a "credibility ballast" of 4 percent was not reasonable. The Department next determined that a "credibility factor" of 24.94 percent, the credibility factor Fortune had used in its 1993 Request, was generally accepted and reasonable actuarial technique. Fortune failed to prove that the use of a "credibility factor" of 24.94 percent was not reasonable. Based upon the foregoing, and using a catastrophic load factor of 1.141, the Department determined that the overall statewide indication for Fortune was the need to increase it's rates by 6.7 percent. Fortune had used the 1.141 catastrophic load factor in the 1993 Request. The Department agreed, and the evidence proved, that a catastrophic load factor of 1.357 is actuarially acceptable and reasonable. Using a 1.357 catastrophic load factor results in an increase of 9.1 percent. The evidence failed to prove that this conclusion is unreasonable. The Department next determined the relativity between the rates sought for the zones by Fortune to determine how to allocate the overall statewide rate increase indicator. The base rate sought for Zone I ($443.00) was used as the base. The base rate sought for Zone III was .86 of the base rate in Zone I ($380.00/$443.00) and it was concluded that this relativity was reasonable. The evidence failed to prove that this conclusion was unreasonable. The relativity between Zone I and Zone II was determined to be unreasonable because the rate sought for Zone II ($445.00) was greater than that of Zone I ($445.00/$443.00 or 1.01). The Department concluded that the relativity of Zone II should have been between Zones I and III. Therefore, the relativity of Zone II was changed to .94 by reducing the rate sought by Fortune in its 1993 Request from $445.00 to $400.00 ($400.00/$443.00 or .94). The evidence failed to prove that this conclusion was unreasonable. The relativity between Zone I and Zone IV was also determined to be unreasonable: $655.00 rate for Zone IV divided by the rate sought for Zone I of $443.00 or a relativity of 1.48. This relativity was determined to be unreasonable and was reduced to .77, which placed it below Zones I, II and III. The evidence failed to prove that this conclusion was unreasonable. Having determined the relativity of the Zones, the Department determined the appropriate rate for Zone I based upon its determination of the overall statewide rate increase indicator. Except for the fact that the Department should have based this final calculation on a catastrophic load factor of 1.357 and not 1.141, resulting in an overall statewide rate increase indicator of 9.1 instead of the 8.9 indicator utilized by the Department, the evidence failed to prove that the Department's calculation of the rates for the four zones based upon the relativities determined by the Department was unreasonable. Fortune's Zone I, II and III Rates. The parties agreed that the rates for Zones I, II and III are inadequate. The only disagreement of the parties involved the extent of the inadequacy. Fortune argued that the inadequacy of its rates for Zones I, II and III is greater than that determined by the Department. Fortune failed to prove that the Department's determination of the extent of the inadequacy of the rates for Zones I, II and III was incorrect except to the extent that the Department used a catastrophic load factor of 1.141 instead of 1.357. The correct overall statewide rate increase indicator to be utilized in determining the extent of inadequacy of the Zones I, II and III rates should be 9.1 instead of 8.9. Fortune's Zone IV Rate. The Department determined that Fortune's Zone IV rate was excessive. Fortune failed to prove that the Department's determination that the Zone IV rate is excessive is incorrect except to the extent that the Department used a catastrophic load factor of 1.141 instead of 1.357. The correct overall statewide rate increase indicator to be utilized in determining the extent of excessiveness of the Zone IV rate should be 9.1 instead of 8.9.
The Issue Whether the proposed rules, 60Z-1.026 and 60Z-2.017, Florida Administrative Code, published in the Florida Administrative Weekly on March 7, 2003 (Volume 29, No. 10, at pages 979-80), constitute an invalid exercise of delegated legislative authority.
Findings Of Fact Petitioner, Florida League of Cities, Inc. (“League”), is a not-for-profit Florida corporation located at 301 South Bronough Street, Suite 300, Tallahassee, Florida 32301. The League is a wholly owned instrumentality of its 405 member cities. The League’s purpose is to work for the general improvement of municipal government and its effective administration in this state, and to represent its members before the legislative, executive and judicial branches of Florida’s state government on issues pertaining to the welfare of its members. The League’s members include 175 cities with pension plans for firefighters established pursuant to Chapter 175; and 184 cities with pension plans for police officers established pursuant to Chapter 185. Petitioner Casselberry maintains a local law pension plan for its firefighters and police officers pursuant to Chapters 175 and 185. Casselberry’s pension plan was in effect on October 1, 1998. Casselberry’s pension plan meets all the minimum benefit requirements of Chapters 175 and 185. Casselberry’s police/fire pension plan provides benefits in addition to or greater than the pension benefits it provides to general employees that cost as much or more than the total amount of premium taxes received by the City of Casselberry. Petitioner Deerfield Beach maintains a local law pension plan for its police officers pursuant to Chapter 185, Florida Statutes. Deerfield Beach’s pension plan meets all the minimum benefit requirements of Chapter 185. Further, Deerfield Beach’s police pension plan provides benefits in addition to or greater than the pension benefits it provides to general employees that cost as much or more than the total amount of premium taxes received by the City of Deerfield Beach. Petitioner Greenacres maintains a local law pension plan for its firefighters and police officers pursuant to Chapters 175 and 185, Florida Statutes. Greenacres’ pension plan meets all the minimum benefit requirements of Chapters 175 and 185. Greenacres’ police/fire pension plan provides benefits in addition to or greater than the pension benefits it provides to general employees that cost as much or more than the total amount of premium taxes received by the City of Greenacres. Petitioner Kissimmee maintains a local law pension plan for its firefighters pursuant to Chapter 175. Kissimmee’s firefighter pension plan meets all the minimum benefit requirements of Chapter 175. Kissimmee’s firefighter pension plan provides benefits in addition to or greater than the pension benefits it provides to general employees that cost as much or more than the total amount of premium taxes received by the City of Kissimmee. Petitioner New Port Richey maintains a local law pension plan for its firefighters pursuant to Chapter 175. New Port Richey’s firefighter pension plan meets all the minimum benefit requirements of Chapter 175, and provides benefits in addition to or greater than the pension benefits it provides to general employees. These benefits cost as much or more than the total amount of premium taxes received by the City of New Port Richey. Chapters 175 and 185, govern the establishment and operation of defined benefit retirement plans for municipal police officers and firefighters employed by cities and special districts. These Chapters also contain a revenue sharing program that allows participating cities and districts to receive a portion of the state excise tax on property and casualty insurance premiums collected on policies covering property within each jurisdiction. In order to qualify for the annual distribution of premium tax revenues provided by Chapters 175 and 185, the local government pension plan must comply with the applicable provisions of those statutes. Sections 175.351(1) and 185.35(1), respectively, of those Chapters were amended in 1999 by Chapter 99-1, Laws of Florida. The two Sections are virtually identical and can be treated interchangeably for the purposes of this proceeding. Section 175.351(1), in pertinent part, reads as follows: PREMIUM TAX INCOME.--If a municipality has a pension plan for firefighters, or a pension plan for firefighters and police officers, where included, which in the opinion of the division meets the minimum benefits and minimum standards set forth in this chapter, the board of trustees of the pension plan, as approved by a majority of firefighters of the municipality, may: Place the income from the premium tax in Section 175.101 in such pension plan for the sole and exclusive use of its firefighters, or for firefighters and police officers, where included, where it shall become an integral part of that pension plan and shall be used to pay extra benefits to the firefighters included in that pension plan; or Place the income from the premium tax in Section 175.101 in a separate supplemental plan to pay extra benefits to firefighters, or to firefighters and police officers where included, participating in such separate supplemental plan. The premium tax provided by this Chapter shall in all cases be used in its entirety to provide extra benefits to firefighters, or to firefighters and police officers, where included. However, local law plans in effect on October 1, 1998, shall be required to comply with the minimum benefit provisions of this chapter only to the extent that additional premium tax revenues become available to incrementally fund the cost of such compliance as provided in Section 175.162(2)(a). When a plan is in compliance with such minimum benefit provisions, as subsequent additional premium tax revenues become available, they shall be used to provide extra benefits. For the purpose of this chapter, ‘additional premium tax revenues’ means revenues received by a municipality or special fire control district pursuant to Section 175.121 that exceed that amount received for calendar year 1997 and the term ‘extra benefits’ means benefits in addition to or greater than those provided to general employees of the municipality. Local law plans created by special act before May 23, 1939, shall be deemed to comply with this chapter. (Underscored language was enacted by Chapter 99-1, Laws of Florida.) The above-quoted underscored language of Sections 175.351 and 185.35 became effective March 12, 1999. The Division of Retirement advised all cities and districts that they could use additional premium tax revenues received in excess of the amount received for 1997 solely to pay for new extra benefits adopted after March 12, 1999. The additional premium tax revenues could not be used to pay for extra benefits adopted before March 12, 1999. Consequently, responsibility for the cost to local governments for extra benefits adopted prior to March 12, 1999, is not defrayed by additional premium tax benefits and must be absorbed by the particular local government. As established by testimony of Respondent's Actuary, Charles Slavin, along with Article X, Section 14 of the Florida Constitution and Part VII, Chapter 112, governmental pension plans must be funded on a “sound actuarial basis.” A plan is actuarially funded when funded by contributions which, when expressed as a percent of active member payrolls or a fixed dollar amount, will remain approximately level from year to year and will not have to be increased in the future, in the absence of benefit improvements. Actuarial funding is based on reasonable assumptions, predictable events and variables so that all the funds necessary to pay employees' future benefits are accumulated by the expected date of benefit payments. A pension plan is funded on a sound actuarial basis when a funding program has been established which, with the payment of level contributions and investment returns over the lifetime of the participants, will fund the difference between the value of expected promised benefits and the available assets. Although pension benefits increase in future years from increased salaries and other facts, pension plans are usually funded on a constant level percentage of payroll. Such funding pays the normal fiscal cost and amortizes unfunded liabilities as required by Chapter 112, Part VII. Payroll growth helps pay for increases in the cost of benefits because employee contributions, based on a level percentage of payroll produce increased funding. Liability increases are offset by payroll growth. Extra benefits for firefighters and police officers in excess of those provided general employees, that were enacted by local governments, prior to or after March 12, 1999, were required by law to be funded on a sound actuarial basis. Premium tax revenues to the local governments are not within the control of those local governments since the amount of tax levied is set by the legislature through statutory enactment. Accordingly, inclusion of future revenues in future years from the premium tax is not a proper actuarial assumption in the funding of extra benefits. Some local governments, despite this categorization of the premium tax revenue, enacted special benefits in reliance upon possible future increases in revenues from the tax to fund special benefits. All local government Petitioners in the present proceeding meet the minimum benefit requirements of Sections 175.162 and 185.16. The cost of extra benefits enacted by Petitioners prior to the effective date of Chapter 99-1 (March 12, 1999), generally exceeded the amount of the premium tax received by Petitioners. Respondent's requirement that Petitioners set aside additional premium tax revenues to fund solely future benefit increases prevented the reduction of future funds for future benefits. Respondent's proposed rules, 60Z-1.026 and 60Z-2.017, are identical with exception that one is applicable to Sections 175.351(1) and 185.35(1), respectively, and read as follows: Use of premium tax revenues: For pension plans that were in effect on October 1, 1998, that have not met the minimum benefit requirements described in Section 185.16, benefits shall be increased incrementally as additional premium tax revenues become available. For pension plans that were in effect on October 1, 1998, that provide benefits that meet or exceed the minimum benefits described in Section 185.16, increases in premium tax revenues over the amount collected for calendar year 1997, must be used in their entirety to provide extra benefits in addition to those benefits provided prior to the effective date of Chapter 99-1, Laws of Florida. For plans that were not in existence on October 1, 1998, premium tax revenues must be used in their entirety to provide extra benefits. Respondent interprets "additional premium benefits" as defined in Sections 175.351 and 185.35 to mean premium tax benefits greater than those received in 1997 and distributed to cities in 1998, prior to enactment of Chapter 99-1. "Extra benefits" means benefits greater than those afforded general employees and in addition to or greater than those benefits enacted prior to the effective date of Chapter 99-1. These definitions presume that amendments in Chapter 99-1 are to be applied prospectively, or after the effective date of that legislative enactment. Extra benefits enacted prior to that date must be funded from premium tax dollars received prior to that date. No evidence was presented by Petitioners of legislative intent that "additional premium tax revenues" should or could be used to fund existing extra benefits enacted prior to Chapter 99-1.
