Findings Of Fact The Department of Insurance (Respondent) is charged with regulating the business of insurance in the State of Florida. As part of this responsibility, Respondent examines and analyzes rate increases. The scope of proposed Rule 4-166.051, Florida Administrative Code, entitled "Examination of Significant Rate Increases," provides: (2) Scope. This rule applies to residential and habitational, personal and commercial property insurance in the State of Florida . . . . The proposed rule requires Respondent to conduct public hearings on rate increases of insurers under certain specific conditions: (3) Public Hearings. Significant Rate Increases. The Department will hold a public hearing on any rate filing where the percentage of rate increase is 25 percent or more and the aggregate amount of such rate increase is $2,000,000 or more, or a rate increase of 50 percent or more. The Department will hold a public hearing as to any rate filing which appears to have a signi- ficant or disproportionate impact on any group or geographic area. Respondent contends that insurers employing the present methods for rate filings would be able to calculate the increases and would, therefore, have no difficulty in determining whether they meet the threshold in the proposed rule. The proposed rule provides in Section (3) a procedure for the public hearings: Procedure. The time and place of the public hearing will be noticed by order of the Department. The public hearing shall be for the purpose of gathering information and evidence, and is not subject to the procedures of Chapter 120, Florida Statutes. Each insurer shall bear its own costs, including any attorney's fees, which may be associated with this examination and with its attendance at the public hearing. Specifically, the public hearing will provide the Department with, and the insurer shall be prepared to present, information necessary to determine whether: The proposed activity will have a hazardous or detrimental effect upon the residential property insurance market in this State and a specific adverse, hazardous, or detrimental effect upon its policyholders located in this State. The proposed activity violates the terms and conditions of residential property insurance policies and constitutes material misrepresentation, or results in the insurer having unlawfully misrepresented the benefits and promises which induced its policyholders to purchase policies from the insurer. The proposed rating structure, elimination of current policyholders, and overall marketing strategies of the insurer, in relation to current market conditions in this State, render the insurer's rates excessive, inadequate, or unfairly discriminatory. The proposed activity constitutes an arbitrary or capricious act of unfair discrimination against policyholders, and constitutes a practice detrimental to the insurer's policyholders or the insurance buying public. The proposed activity will adversely contribute to a further reduction in the availability of residential property insurance in this State and the ability of the current admitted market to absorb further losses or liabilities. The proposed activity will adversely impact the Residential Property and Casualty Joint Underwriting Association's (RPCJUA) ability to provide coverage and/or service to present or potential insureds. Other relevant impact. Respondent is granted general authority by the Legislature, through Section 624.324, Florida Statutes, to hold public hearings within the scope of the insurance code 1/ whenever it deems such action necessary. Respondent contends that this authorization includes holding public hearings on rate increases which it has deemed necessary to be in the public eye. Section 627.062, Florida Statutes, entitled "Rate standards," provides that no rate shall be "excessive, inadequate, or unfairly discriminatory" and mandates certain specific factors and standards to be considered by Respondent when making a determination whether a rate is excessive, inadequate, or unfairly discriminatory. Respondent contends that the factors and standards in Section 627.062 are not all inclusive but are only some of the factors and standards to be considered; the others are located throughout the insurance code. Respondent contends that interpreting Section 627.062, Florida Statutes, requires a reading of the insurance code as a whole. For example, some terms in Section 627.062 are explained in other parts of the code, so the applicable parts of the code defining and explaining the terms would have to be read in para materia with Section 627.062. The proposed rule is designed, as contended by Respondent, to affect only those insurers which significantly increase their residential property insurance rates; it is not designed to affect all insurers which increase their rates. Also, as part of its design, the proposed rule reflects Respondent's experience with the impact of Hurricane Andrew on the consumer and the insurance industry and with an emergency rule which addressed the same subject of rate increases. However, the emergency rule included lower thresholds in which Respondent attempted to affect only those insurers with significant rate increases. The proposed rule serves, as contended by Respondent, four purposes: to assist Respondent in its statutory duty to report annually to the Legislature; (2) to reveal subtle, but important, factors which affect Respondent's decision in determining whether a proposed rate is excessive; (3) to assist Respondent in uncovering unfair trade practices, if any, in proposed rate increases; and (4) to ameliorate the impact of large rate increases on consumers. As to Respondent's reporting duty, part of Respondent's statutory responsibility is to report the ramifications and implications of large rate hikes to the Legislature. Because of the devastation caused by Hurricane Andrew, an unprecedented number of rate filings for large increases have occurred and a severe availability crisis exists with residential property insurance; if insurance is unaffordable, it is unavailable. Respondent contends that in order to make a determination on the rate filings, it must know the ramifications of the rate hikes on insureds and that public hearings provide an avenue to obtain such information. Regarding the subtle, but important, factors affecting Respondent's determination of whether a proposed rate is excessive, a public hearing, contends Respondent, would allow Respondent to include the effects of the proposed rate increase on the lives of consumers, removing the effect from only the mathematical or academic arena. Respondent contends that obtaining information of such an effect would include an examination of market conditions, which it is authorized to do by Section 627.062, 2/ and which examination includes reviewing marketing techniques, such as advertising, for misrepresentations by insurers. As to assisting Respondent to uncover unfair trade practices, Respondent points to "redlining" as an example which in the context of rate increases would encompass the denial of insurance by an insurer to a certain group of people in a given territory because of the increase, i.e., the increase would cause the insurance to be unaffordable and, therefore, unavailable to a certain group of people within a given territory. The insurance code provides a redlining statute 3/ which addresses redlining as the refusal to insure or to continue to insure a risk solely because of certain enumerated factors. Regarding the amelioration of the impact of large rate increases on consumers, Respondent contends that public hearings would provide a forum for the insurer and consumer or insured to freely exchange information and to educate one another on their respective positions and on the effects of a rate increase on both of them. According to Respondent, consumers have a belief that insurers increase rates unreasonably. Additionally, Respondent contends that, through the public hearing, it could direct consumers to less expensive alternatives. The term "proposed activity" is used in the proposed rule but is not defined by it. Respondent contends that no limits would be placed on the subject matter addressed in the public hearings but that any matter which may have a bearing on any of the items in the proposed rule would be addressed in the public hearings. Pursuant to Section 627.0613, Florida Statutes, the insurance code provides for an Insurance Consumer Advocate who is authorized to examine rate filings and to make a recommendation to Respondent that the Consumer Advocate deems to be in the public interest. There are approximately 1,200 rate filings a year, and the Consumer Advocate is unable to examine each filing, so he has developed a formula for selecting the rate filings for review. A public hearing on a rate filing would be useful to him in executing his statutory function regarding rate filings; however, such a public hearing is not authorized by Section 627.0613. American Insurance Association's standing is not at issue in this proceeding.
The Issue In this proceeding, pursuant to Section 120.56(4), Florida Statutes, Petitioner United Property & Casualty Insurance Company ("United") challenges several alleged "statements" of Respondent Department of Insurance (the "Department"), which United alleges are rules as defined in Section 120.52(15), Florida Statutes, that have not been adopted properly and therefore violate Section 120.54(1)(a), Florida Statutes. The statements at issue arise from the Department's interpretation and implementation of statutes that authorize insurers such as United to recoup reimbursement premiums paid to the Florida Hurricane Catastrophe Fund (the "CAT Fund"). United seeks a final order: (1) declaring that some or all of the above alleged statements, in whole or in part, violate Section 120.54(1)(a), Florida Statutes; (2) directing that the Department immediately stop relying on any illegal unadopted rule as a basis for agency action; and (3) awarding reasonable attorneys' fees and costs pursuant to Section 120.595(4)(a), Florida Statutes.
Findings Of Fact The evidence presented at final hearing established the facts that follow. The Parties United is a Florida domiciled property and casualty insurance company that received its Certificate of Authority to write homeowners and dwelling fire insurance in this state on April 2, 1999. As an insurer transacting business in this state, United operates within and subject to the regulatory jurisdiction of the Department, which is the executive branch agency responsible for administering and enforcing the Florida Insurance Code. Rates and Premiums United is required by law to establish rates for the lines of insurance it writes in this state. See Section 627.062, Florida Statutes. A "rate" is "the unit charge by which the measure of exposure or the amount of insurance specified in a policy of insurance or covered thereunder is multiplied to determine the premium." Section 627.041(1), Florida Statutes. The term "premium" means "the consideration paid or to be paid to an insurer for the issuance and delivery of any binder or policy of insurance." Section 627.041(2), Florida Statutes. Thus, simply put, the rate times the amount of coverage equals the cost of insurance, which may then be adjusted further to calculate the total premium to be charged a particular policyholder — by applicable discounts, credits, or surcharges included in the insurer's approved rating plan. See, e.g., Section 627.062(2)(d), (e)4, Florida Statutes. Rates and rating plans must be approved by the Department. See Section 627.062, Florida Statutes. The Department's duty is to disapprove rates that are "excessive, inadequate, or unfairly discriminatory." Id. An appropriate and adequate rate "is supposed to pay all the [insurer's costs]," T-222, and afford the insurer "a reasonable rate of return on [the] classes of insurance written [by that insurer] in this state." Section 627.062(2)(a), Florida Statutes. United's Initial Rate Filings and Take-Out Plan On March 3, 1999, United made two initial rate filings with the Department, one for homeowners insurance and the other for dwelling fire. As United explained in its cover letters to the Department, each line of business constituted a proposed "Take Out Program," meaning that United planned to remove homeowners and dwelling fire policies from the Florida Residential Property and Casualty Joint Underwriting Association ("FRPCJUA"). 5/ United also advised the Department that each Manual of Rates and Rules that it was filing was "basically that of the FRPCJUA with some modification to remove extraneous provisions and change names." The parties sometimes have called this type of rate filing a "me too" filing, a descriptive appellation that quickly, if colloquially, conveys the idea that the insurer is taking advantage of the FRPCJUA's already approved rates. On March 3, 1999, the Department's Bureau of Property and Casualty Forms and Rates accepted United's initial homeowners and dwelling fire insurance rates for use. Later, United's rates were approved with an effective date of April 19, 1999. On April 2, 1999, pursuant to a Consent Order with the Department which approved United's take-out plan, United removed approximately 11,500 policies from the FRPCJUA. Each of the policies that United removed from the FRPCJUA is a "covered policy" as defined in Section 215.555(2)(c), Florida Statutes. Consequently, United was required, as is every insurer that writes covered policies in this state, to enter into a "reimbursement contract" with the State Board of Administration, the agency that directs and controls the CAT Fund. Section 215.555(4), Florida Statutes. The CAT Fund and Reimbursement Premiums The legislature created the CAT Fund in November 1993 during a special session that was "called due to a potential crisis in the insurance industry in the aftermath of Hurricane Andrew." 6/ The CAT Fund's purpose was and remains to provide "a stable and ongoing source of reimbursement to insurers for a portion of their catastrophic hurricane losses." Section 215.555(1)(e), Florida Statutes. In consideration for the right to reimbursement from the CAT Fund in the event of a hurricane catastrophe, insurers are required, under their reimbursement contracts, annually to pay into the fund a reimbursement premium. Id.; see also Section 215.555(5), Florida Statutes. Recoupment of Reimbursement Premiums In 1995, the legislature passed a law allowing insurers to recoup reimbursement premiums paid into the CAT Fund. See Chapter 95-276, Laws of Florida. Effective June 14, 1995, this new law, codified as Section 627.062(5), Florida Statutes (Supp. 1996), provided: With respect to a rate filing involving coverage of the type for which the insurer is required to pay a reimbursement premium to the Florida Hurricane Catastrophe Fund, the insurer may recoup the actual amount of reimbursement premium by including in the insurer's rate filing an allowance for the reimbursement premium charged by the Florida Hurricane Catastrophe Fund. In the filing, the insurer must adjust its rates to remove that portion of the rates attributable to catastrophe losses expected to be covered by the Florida Hurricane Catastrophe Fund. In determining what portion of a rate is attributable to catastrophes covered by the Florida Hurricane Catastrophe Fund, the projected recovery from the fund shall be calculated according to the formula specified in s. 215.555(4)(c). During its next regular session, in 1996, the legislature enacted Chapter 96-194, Laws of Florida, which amended Section 627.062(5), Florida Statutes, effective January 1, 1997, to read: With respect to a rate filing involving coverage of the type for which the insurer is required to pay a reimbursement premium to the Florida Hurricane Catastrophe Fund, the insurer may fully recoup in its property insurance premiums any reimbursement premiums paid to the Florida Hurricane Catastrophe Fund, together with reasonable costs of other reinsurance, but may not recoup reinsurance costs that duplicate coverage provided by the Florida Hurricane Catastrophe Fund. Section 627.062(5), Florida Statutes (1997). This version of the section remains in effect today. In 1997, the legislature created yet another new statute addressing the subject of CAT Fund reimbursement premiums. See Chapter 97-55, Laws of Florida. Taking effect on May 9, 1997, Section 672.0629(10), Florida Statutes, provides: A property insurance rate filing that includes any adjustments related to premiums paid to the Florida Hurricane Catastrophe Fund must include a complete calculation of the insurer's catastrophe load, and the information in the filing may not be limited solely to recovery of moneys paid to the fund. The Department's Interpretation and Implementation of the Recoupment Statutes Douglas Hazeltine, an actuary employed by the Department, is the principal regulator regarding recoupment of CAT Fund reimbursement premiums. In that capacity, he is, and at all material times has been, responsible for interpreting and applying Sections 627.062(5) and 627.0629(10), Florida Statutes. Although he denied having a policy-making role at the Department, Mr. Hazeltine testified that his interpretation and application of these particular statutes consistently has been approved by his superiors, with whom (as well as with other colleagues) he has discussed these matters. Accordingly, great weight has been given to Mr. Hazeltine's testimony as an accurate expression of the Department's positions on the meaning and operation of Sections 627.062(5) and 627.0629(10), Florida Statutes (hereafter, collectively, the "Recoupment Statutes"). 7/ The Department takes the view that insurers may pass along the CAT Fund reimbursement premiums to their own policyholders in one of two ways. The first method — which, according to Mr. Hazeltine, is employed by most insurance companies — is to prospectively load the base rates with a CAT Fund Factor (that is, a factor attributable to catastrophic hurricane losses expected to be covered by the CAT Fund, see endnote 3). In the Department's eyes this is simply normal rate-making procedure; the exposure covered by the CAT Fund is built into the insurer's base rates, just as other risks are, as if the insurer itself (rather than the CAT Fund) would pay the portion of any catastrophic hurricane losses expected to be covered by the CAT Fund. The Department does not consider the Recoupment Statutes to either govern or proscribe the accepted practice of prospectively loading base rates with a CAT Fund Factor. The other method is to set base rates that are net of expected recoveries from the CAT Fund (i.e. are not loaded with a CAT Fund Factor) and thereafter to impose a recoupment charge on policyholders to recover for CAT Fund reimbursement premiums paid in the previous year. A recoupment charge is retrospective, in that the insurer is collecting funds to reimburse itself for an expense that it already has paid. As Mr. Hazeltine put it, "recouping refers to something that happened in the past." Transcript of Final Hearing ("T-") 152. That is the "essence of a recoupment." T-220. The term "Recoupment Surcharge" will be used hereafter to refer to a retrospective recoupment charge. The Department considers these two methods of making policyholders pay the CAT Fund reimbursement premiums to be mutually exclusive, in the sense that an insurer must elect to use one method or the other. Thus, according to the Department, an insurer may either prospectively load its base rates to collect in advance for reimbursement premiums that will be paid in the future, or impose a Recoupment Surcharge to recover for the reimbursement premiums after paying them, but it cannot include a CAT Fund Factor in its base rates one year (e.g. 1999) and then impose a Recoupment Surcharge the next (e.g. 2000), else the policyholders would pay twice for the same CAT Fund coverage. The Department's position logically dictates that if an insurer which has been prospectively loading its base rates with a CAT Fund Factor decides to switch to the recoupment method, it must experience a transitional year during which its base rates are reduced by the CAT Fund Factor (because it will recoup the transitional year's reimbursement premiums in the next year) and in which no Recoupment Surcharge is imposed (because the prior year's reimbursement premiums were collected prospectively in the prior year's base rates). 8/ This would have a negative effect on the insurer's cash flow during the transitional year, in relation to the preceding year, which may be one reason why "most companies don't recoup" — although that was not the explanation offered by Mr. Hazeltine. T. 172 (attributing insurers' preference for prospective loading to fact that CAT Fund is "cheap reinsurance"). 9/ The Department's interpretation and application of the Recoupment Statutes is informed by a presumption that every insurer's base rates are prospectively loaded with a CAT Fund Factor unless and until: (a) the insurer makes a recoupment filing pursuant to Section 627.0629(10), Florida Statutes, which demonstrates to the Department that the CAT Fund Factor has been stripped from its base rates, and (b) the Department approves the insurer's recoupment filing, allowing the insurer to impose a Recoupment Surcharge. This presumption is based on the premise that an insurer's rates on file, having already been approved, are adequate and "fully loaded in the Department's opinion." T-223-24; see also T-153, and 170 (Hazeltine: "Whenever a company makes an initial filing, we assume that the rates that are approved -- the Department, we believe the rates that they are charging are fully loaded for all costs and they would remain that way, fully loaded for all costs, until they made a filing to change in some way."). The presumption that an insurer which is not recouping must be prospectively collecting for reimbursement premiums with CAT Fund Factor-loaded base rates is irrebuttable and hence conclusive, as Mr. Hazeltine explained: THE COURT: Can the insurance company overcome that presumption? I mean, if evidence or information is presented, can the insurance company demonstrate inadequacy of its rates by showing, for example, that it isn't -- that it is not prospectively recovering for the CAT Fund premium? THE WITNESS: Well, no, because they have to be. They have to be because there's [sic: should be "they're"] not recouping. So the definition of their rate is that it's prospectively loaded. They somehow have to show -- to recoup, they would have to show that they have an inadequate rate otherwise, and that is why the CAT factor calculation is necessary because they have to show that, without this additional money, they have an inadequate rate. THE COURT: Could they show -- I mean, could they show inadequacy of the rate by demonstrating that there is no catastrophe load in their rate and therefore they're not collecting prospectively? THE WITNESS: No, because the only way there could not be a catastrophe load in their rate is if they had started recouping, if they had already started recouping. Otherwise, it's there, it's implicitly there. T-224-25. 10/ The Department's presumption leads it to the conclusion that any insurer which elects to begin recouping must first adjust its base rates to remove the CAT Fund Factor that is conclusively presumed to be in those rates. T-172 (Hazeltine: Insurers "can come in and recoup, that's allowed, but they have to adjust their base rates."). 11/ Consequently, the Department construes Section 627.0629(10), Florida Statutes which operates on rate filings that include "any adjustments related to" reimbursement premiums 12/ — as controlling for all first-time recoupment filings. 13/ While the Department interprets Section 627.0629(10), Florida Statutes, to be applicable to all insurers making their first recoupment filings, it also considers the statute to be applicable only to first-time filers. Mr. Hazeltine drew the distinction between first-time and repeat filers: Q Now, you just made reference to a filing like United's for a first-time [recoupment] filing. Is there different information required for a company like United that's a first-time company filing for recoupment as versus some other type of company? A Right. Once the filing has been made and the catastrophe factor has been submitted and the indicated rate has been shown in the filing, any subsequent filings we would just simply need to know that a prior filing had been made so that, if they were going to change the recoupment surcharge from say eight to nine percent, if we knew that they made a prior filing, then we would know that they had adjusted their bases rates, so there wouldn't need to be the laying out of the catastrophe factor. T-149; see also T-225 (Hazeltine: "[W]e get filings in where [insurers] are already recouping, and in that situation we know, when they've filed to change their recoupment, that their base rates are net of the coverage of the CAT Fund. We know that because we handled that in a previous filing."). Thus, in the Department's view as expressed by Mr. Hazeltine, Section 627.0629(10) does not apply to an insurer that seeks to adjust a previously approved Recoupment Surcharge because the Department's approval of the insurer's initial recoupment filing signifies that the CAT Fund Factor was removed from the insurer's base rates, which accordingly need not be adjusted again. 14/ The parties agree (or at least United does not dispute) that an insurer wanting to recoup reimbursement premiums must make a filing with the Department. Both parties refer to the necessary filing as a "recoupment filing." They part company, however, on whether a recoupment filing is a "rate filing." The Department says that a recoupment filing is "a type of rate filing." T-165. United says it is not. This particular dispute is not so much about labels as it is about whether the procedural and substantive requirements that rate filings entail should attach to recoupment filings as well. The Department's position that a recoupment filing is a rate filing matters because it leads to the conclusion that the Department is empowered, pursuant to Section 627.062(2)(b), Florida Statutes, to review a recoupment/rate filing to determine if the overall rate (including the Recoupment Surcharge) is excessive, inadequate, or unfairly discriminatory. This in turn means that the Department can disapprove a recoupment filing for failure to provide sufficient "justification" in support of a proposed Recoupment Surcharge, viewed in the context of the insurer's total rate. See T-169. In addition, if recoupment filings are rate filings as the Department maintains, then the procedural and informational requirements of Rule 4-170.014, Florida Administrative Code (governing all homeowners insurance rate filings), and Rule 4-170.0141, Florida Administrative Code (governing dwelling fire insurance rate filings), might apply to them as well. Indeed, on the premise that recoupment filings are rate filings, the Department believes that all of its requirements for recoupment filings are covered by existing statutes and rules. T-253. However, neither of the Recoupment Statutes, nor any other exiting statute or rule, clearly and unambiguously sets forth a requirement that, in order to exercise its right to fully recoup, an insurer must submit a filing — whether it be called a “rate filing,” “recoupment filing,” or something else — that fully complies with the statutes and rules governing rate filings generally. At bottom, the Department's position that recoupment filings are rate filings is an interpretation of the Recoupment Statutes that can be used, and is being used, as a bootstrap to impose filing requirements that are not specifically stated in either Section 627.062(5) or Section 627.0629(10), Florida Statutes. Moreover, the Department does not require recoupment filings to comply with all of the procedures controlling rate filings generally. As Mr. Hazeltine explained: "A retroactive recoupment is a fairly -- is a less involved filing in a sense because the base rate filing may go through a lot of justification for territorial rates or there may be a lot more detail in a base rate filing." T-172 (Emphasis added). Mr. Hazeltine further described the fundamental data indispensable to a first-time recoupment filing as follows: I think what's really needed is what Mr. Stuart said. In making a recoupment filing, you need simply to show the amount of a factor, which you get by dividing the premium into the -- into the amount to be recouped. That gave him the percentage to load the rate, and you need to show your catastrophe load or the calculation of your rate so that the policyholder doesn't wind up paying twice, because if you included it in your base rates and also as a recoupment, then the policyholder would be paying for the coverage of the Catastrophe Fund twice, both in the base rate and also in the factor. * * * . . . Like I said, all you really need to know and all you -- is the projected premium. You need to know how to compute -- how the company's going to compute its factors, and you need some justification or analysis showing the catastrophe load and the total indicated rate. T-136, 142. The truly essential requirements for an insurer's subsequent recoupment filings are fewer still, as previously discussed, because "there wouldn't need to be the laying out of the catastrophe factor." T-149. There are "many types" of rate filings, said Mr. Hazeltine, and the information required to be supplied depends on the type of filing involved. T-165. The Department's statement that recoupment filings are rate filings does not, in itself, inform would-be filers which of the requirements for rate filings generally must be followed — nor do the statutes or any promulgated rules. The Proposed Rule In 1996, the Department developed a proposed rule concerning the recoupment of reimbursement premiums. Initially published on July 26, 1996, in Volume 22, Number 30 of the Florida Administrative Weekly, page 4243, Proposed Rule 4-170.016 (the “Proposed Rule”) was designed to “provide a streamlined rate revision process for the approval of requests for rates which recoup payments to the Florida Hurricane Catastrophe Fund (FHCF) . . . .” Petitioner’s Exhibit 6. The summary description of the Proposed Rule explained that it provided “specified procedures for submitting rate filings to recoup payments made to the FHCF . . . , adopt[ed] forms by reference and provide[d] limitations on amounts recoverable in a given year.” Id. It is interesting to note that the Proposed Rule appeared in the Florida Law Weekly about two months after the legislature had amended Section 627.062(5), Florida Statutes, but some six months before that amendment would take effect. Thus, at the time the Proposed Rule was published, the law allowed an insurer to recoup the “actual amount of reimbursement premium” by making a rate filing which “adjust[ed] its rates to remove that portion of the rates attributable to catastrophe losses expected to be covered by the” CAT Fund. See Section 627.062(5), Florida Statutes (Supp. 1996). Come January 1, 1997, however, Section 627.062(5) would no longer contain the language just quoted; rather, insurers would be entitled to “fully recoup” any CAT Fund reimbursement premiums they had paid without being subject to an express requirement that base rates be adjusted concomitantly. See Section 627.062(5), Florida Statutes (1997). Perhaps to close this potential loophole, the Proposed Rule incorporated the “lame duck” statutory requirement that base rates be reduced in conjunction with a recoupment filing: “If an insurer chooses to apply a recoupment charge, the insurer’s next rate filing must exclude the portion of the rates attributable to catastrophic losses expected to be covered by the FHCF or must cease collecting and charge [sic ?] rates to cover expected losses.” Petitioner’s Exhibit 7 (Proposed Rule as amended by notice published November 15, 1996, in Volume 22, Number 46, Florida Administrative Weekly, page 6658). The Proposed Rule also contained a subsection on filing requirements which read: Filing Requirements. An insurer seeking approval of an FHCF reimbursement premium recoupment charge must submit three (3) copies of the following: Recoupment of FHCS Reimbursement Premium Worksheet, Form D14-1197(10/96) which is hereby incorporated by reference plus any supporting documentation for varying the charge by territory or class; final manual page(s) which include the recoupment factor and an explanation of how it will be applied; documentation of the FHCF reimbursement premium paid by the insurer; proposed declarations page; and copies of Forms D14-1102, D14-1103, and D14-1104 as incorporated in 4-170.014, or dwelling Forms D14-1193, D14-01194 and D14-1195, as incorporated in 4-170.0141. Petitioner’s Exhibit 7. The Proposed Rule was challenged in a Section 120.56(2), Florida Statutes, proceeding. The Department withdrew the Proposed Rule on February 21, 1997, apparently before the entry of a final order in the challenge (and after the present version of Section 627.062(5) took effect on January 1, 1997). Since then, the Department has not formally adopted, nor has it attempted to adopt through rulemaking, any rules that implement the Recoupment Statutes or otherwise specifically govern recoupment filings. The Memorandum and Worksheet The Proposed Rule may have been gone, but its provisions were not forgotten. On July 29, 1997, J. Steven Roddenberry, then the Bureau Chief of the Bureau of Property and Casualty Forms and Rates, issued a Memorandum and attached worksheet to “all insurance companies authorized to write property and casualty insurance in the State of Florida.” Petitioner’s Exhibit 8. The subjects of this Memorandum were “procedures for the filing of 1996 Florida Hurricane Catastrophe Fund recoupment; [and] filing deadline for 1995 Florida Hurricane Catastrophe Fund recoupment.” Id. Mr. Roddenberry testified that the purpose of this Memorandum was to provide guidance to insurers on how to make recoupment filings for CAT Fund premiums paid in 1996 and to notify them that recoupment filings for 1995 reimbursement premiums needed to be made by September 1, 1997. The July 29, 1997, Memorandum was sent to the approximately 400 insurers writing property and casualty insurance in this state at the time. United did not exist in 1997 and therefore was not an original recipient of the Memorandum. The timing of the Memorandum in relation to statutory developments is interesting. As of July 29, 1997, Section 627.0629(10), Florida Statutes, was a brand new law, having taken effect only a couple months earlier on May 9, 1997. Section 627.0629(10), with its reference to CAT Fund premium- related “adjustments” in a “rate filing,” faintly echoes language that was deleted from former Section 627.062(5), Florida Statutes, (“In the [rate] filing the insurer must adjust its rates to remove that portion . . . attributable to” CAT Fund coverage) (emphasis added). But Section 627.0629(10) does not expressly state, as did both former Section 627.062(5) and the Department’s withdrawn Proposed Rule, that an insurer electing to recoup must adjust its rates to remove the portion attributable to catastrophic losses expected to be covered by the CAT Fund. The Memorandum memorialized the Department’s interpretation of the Recoupment Statutes as requiring recouping insurers to reduce their base rates to make them net of expected CAT Fund recoveries. It stated: As in the past, an insurer may choose to either prospectively make rates sufficient to cover the costs of the FHCF assessment, while accounting for coverage provided by it, or impose a recoupment charge to recover the assessment payments made to the FHCF. If an insurer chooses to impose a recoupment charge, the insurer must exclude from its base rate calculation the expected recoveries covered by the FHCF. An insurer may not recoup 1996 premiums paid unless it has made, or concurrently makes, a base rate filing, the calculation of which excludes recoveries from the FHCF. Petitioner’s Exhibit 8 (emphasis added). The statutory interpretation reflected in the underlined sentence from the July 29, 1997, Memorandum remains current and continues to be followed by the Department. The Memorandum also enumerated certain filing requirements which bore a striking resemblance to the ones that the withdrawn Proposed Rule would have prescribed. It stated: An insurer intending to recoup the 1996 FHCF premiums paid in 1996 must file three copies of the following for each year being recouped: Recoupment of FHCF Reimbursement Premium Charge Worksheet (please see attached); Final manual page(s) which include the recoupment factor and an explanation of how it will be applied; Documentation of the FHCF reimbursement premium paid by the insurer for 1996; Proposed declaration page; A rate filing (if appropriate) containing actuarial support that shows the calculation of the catastrophe load; and Copies of homeowner forms: D14-1102, D14-1103, and D14-1104, as incorporated in 4-170.014, Florida Administrative Code, or dwelling forms D14-1193, D14-01194 and D14- 1195, as incorporated in 4-170.0141, Florida Administrative Code. The Recoupment of FHCF Reimbursement Premium Charge Worksheet (“Worksheet”), which was the subject of the Memorandum’s filing requirement lettered a, is substantially similar to the proposed Form D14-1197 that was the subject of the withdrawn Proposed Rule’s filing requirement lettered a. The filing requirements lettered b, c, and d, respectively, in the Memorandum and in the withdrawn Proposed Rule are substantially identical to one another. The filing requirement lettered f in the Memorandum is substantially identical to the one lettered e in the Proposed Rule. 15/ In short, the Memorandum listed the same five filing requirements that the Proposed Rule had spelled out and added a sixth, lettered e, which incorporated a new obligation imposed by the recently enacted Section 627.0629(10), Florida Statutes. Although written three and a half years ago for particular purposes that have passed into history, the July 29, 1997, Memorandum nevertheless sets forth the procedural and informational requirements for recoupment filings that the Department continues to enforce to this day, as Mr. Roddenberry testified: THE COURT: . . . Mr. Roddenberry, about the memorandum, July 29, 1997, memorandum, does that memorandum set forth what currently are the pieces of information required by the Department when a company submits a retro –- or a recoupment filing? THE WITNESS: If I may, when you say currently, do you mean like today? THE COURT: Like today. THE WITNESS: Yes, sir, I believe, if this information was submitted, it would be considered a complete file. I’m afraid that, if some of this was missing, that it would not be considered a complete file. * * * THE COURT: And they would need to make a complete filing in order to be subject to approval –- if the filing were incomplete, the request would be denied? THE WITNESS: Yes, sir, because if it’s incomplete, it probably doesn’t even get past the person that not literally opens the mail –- there’s two or three steps in there –- but the person that makes the assignments to the actuaries, they go through it, and if the filing is incomplete, if it doesn’t have what the statute and the rules require, then they send it back to the company. We do that now. The Inspector General told us we had to do that. T-250-52. The Worksheet form that must be submitted to comply with the Memorandum’s first-listed filing requirement (lettered a) contains 15 numbered lines of requested information, as follows: Year FHCF Assessment Paid Line(s) of Business: Prior Year’s FHCF Premium Paid $ Prior Year’s Carry-Forward? No / Yes –- If Yes, State Amount $ 5 (3) Plus (4) $ 6 Prior Year’s Florida Direct Written Premium Excluding Ex-Wind Policies $ 7 Ratio (3) / (6) x 100 8 Forecast (One Year’s) Direct Written Premium Excluding Ex-Wind Policies $ 9 Ratio (5) / (8) x 100 % Ratio (7) Plus 5% % Formula Recoupment Surcharge Lesser of (9) or (10) % Selected Surcharge Factor Effective Date AVERAGE IMPACT ON POLICYHOLDERS / / Average Premium at Current Rate Levels $ (11) Multiplied by (14) $ Petitioner’s Exhibit 8 (footnotes omitted). Mr. Roddenberry testified that the Worksheet per se is no longer required, but “the information that is requested on that form would have to be provided either in that format or some other format . . . .” T-253. Mr. Hazeltine asserted that certain items on the Worksheet are no longer required. According to Mr. Hazeltine, the items numbered 7, 10, and 11 all pertained to a limitation on amounts recoverable in a given year that was part of the Proposed Rule and which has since been abandoned; therefore, the information requested in these items is no longer required. Similarly, the information relating to the average impact on policyholders sought in the items numbered 14 and 15 is no longer required, according to Mr. Hazeltine. Line items 4 and 5 are not applicable to first-time filers such as United but might be required of repeat recoupment filers. As for item number 6, Mr. Hazeltine equivocated somewhat: on the one hand he said it was not a required item; on the other he stated that it was necessary to know last year’s premium, but “you could just figure it out if you wanted to.” T-144. And finally, Mr. Hazeltine testified that item number 9 was not necessary — although the information sought in number 9 is simply another way of expressing the Recoupment Surcharge required in number 12. 16/ While Mr. Roddenberry’s testimony contradicted Mr. Hazeltine’s in that he stated all of the information sought in the Worksheet is still required to be submitted, whereas Mr. Hazeltine dismissed many items as unnecessary, the conflict between the two is not as great as it seems at first blush. The items relating to the since-discarded limitation (numbers 7, 10, and 11) and policyholder impact (14 and 15) are essentially irrelevant to the determination of an insurer’s Recoupment Surcharge. The information sought in the remaining line items (with the possible exceptions of numbers 6 and 9, which are either irrelevant or cumulative questions) is fundamental and must be provided. What is clear is this: The Department continues to require that insurers submit all of the relevant information requested in the Worksheet, either on that form itself or in some other format. United's Recoupment Filings Under substantially identical cover letters to the Commissioner of Insurance dated June 5, 2000, United attempted, with regard to its homeowners and dwelling fire programs, respectively, to file for "recoupment of the Florida Hurricane Catastrophe Fund premiums for the period of June 1, 1999 through May 30, 2000 applicable to [United's] 'Take-out' of 'FRPCJUA assumption' business." United informed the Department that it would apply surcharges of 1.168 and 1.2803, respectively, to all homeowners and dwelling fire policies renewed on or after September 1, 2000. In addition to a cover letter, each of United's June 5, 2000, submissions consisted of a completed form entitled "Recoupment of The Florida Hurricane Catastrophe Fund Reimbursement Premium Charge Worksheet,” which was substantially similar to (and contained the same 15 line items as) the Department's Worksheet, together with an "Explanatory Memorandum" that provided additional information on items 1-4, 6, and 8. 17/ On June 13, 2000, The Department returned United's recoupment filings without action for failure to include pages 1 and 2 of Form D14-582 (a transmittal sheet and checklist, respectively), and a return envelope, as required by Rule 4-170.013, Florida Administrative Code, which provides procedures applicable to all rate, rule, underwriting guidelines, and form filings for property and casualty insurance. United re-submitted its recoupment filings, together with the requested information, on June 20, 2000. Mr. Hazeltine acknowledged the Department's receipt of these "recent rate filing[s]" by letter dated June 27. 2000. On August 4, 2000, Mr. Hazeltine notified United that the following additional information was required to complete United's recoupment filings: (1) documentation supporting the amounts intended to be recouped; (2) an explanation as to how those amounts were allocated to line of insurance and program; (3) documentation supporting an explanation as to how United intended to adjust the catastrophe provision in its base rates; and (4) the HRCS diskette for homeowners and the DRCS diskette for dwelling. United responded with a letter from its president, Mr. Stuart, dated August 21, 2000. Included with Mr. Stuart's letter were documents substantiating the fact that United had paid about $1.68 million in reimbursement premiums for 1999 and showing an allocation of this premium expense between homeowners and dwelling. Apparently attempting to satisfy the Department's request for an explanation as to how United intended to adjust the catastrophe provision in its base rates, Mr. Stuart wrote: My understanding is that [United's consultant] Mr. Trafton was advised by Steve Roddenberry, via telephone, that United would have to base the ["me-too" takeout] filing upon the 7/97 FRPCJUA filing rather than use the 1998 filing which included the JUA recoupment within the base rates. Therefore, our ["me-too" takeout] filing has the identical base rates, as does the 7/97 FRPCJUA filing. This appeared logical since United would not incur a FHCF premium charge until late in 1999 for the June 1, 1999 FHCF period. Joint Exhibit 1. Translation: United did not intend to adjust its base rates because it believed those rates were not loaded to account for the CAT Fund reimbursement premiums. Finally, Mr. Stuart informed Mr. Hazeltine that United was "preparing the diskettes as referenced in your letter of August 4th and should provide these within the next two weeks." Id. After receiving Mr. Stuart's letter, Mr. Hazeltine attempted to contact Mr. Stuart, who was on vacation and therefore unavailable, and then reached a consultant for United named Terry Godbold, whom he advised that the Department would disapprove United's recoupment filings unless the requested diskettes were received, as well as information on the adjustment of United's catastrophe load. United, however, submitted no further information. As a result, by letter dated September 7, 2000, the Department notified United of its intent to disapprove United's recoupment filings on the ground that United had failed to justify its proposed rates or rate changes. The Department found United's filings to be deficient in the following areas: The rates originally filed were not excessive, inadequate, or unfairly discriminatory. No information, or supporting data, has been supplied in support of this filing to justify changing those rates. Section 627.062(5), Florida Statutes, provides that insurers may recoup reimbursement premiums paid to the Florida Hurricane Catastrophe Fund. However, Section 627.0629(10), Florida Statutes, requires a complete calculation of the insurer's catastrophe load and that the information in the filing not be limited solely to recovery of reimbursement premiums paid to the fund. This filing contains information relating solely to the recovery of moneys paid to the fund. The lack of information provided has been discussed thoroughly with the company during the course of this filing. The HPCS [sic] and DRCS diskettes have not been provided as requested. Joint Exhibit 1. At hearing, Mr. Hazeltine testified that United's failure to provide the diskettes, by itself, (probably) would not have resulted in the disapproval of United's filings. T-189. Are United's Base Rates Net of Expected CAT Fund Recoveries? The question whether United’s base rates are net of recoveries expected from the CAT Fund in the event of a hurricane catastrophe, as the Department has presumed, lies at the heart of United’s claim to be entitled to recoup reimbursement premiums previously paid. It is, therefore, a key question that must be answered in Case No. 00-4212, the Section 120.57 proceeding brought by United to obtain a determination of its substantial interests in recouping premiums paid to the CAT Fund. However, because the merits of United’s claim for recoupment are not directly at issue in this proceeding to challenge alleged unadopted rules, 18/ the dispute regarding the composition of United’s base rates need not be resolved here, except insofar as may be necessary to decide the Department’s attack on United’s standing. The Department contends that United lacks standing to maintain this action because it has not been injured by operation of the alleged unadopted rules, even assuming for argument’s sake that the alleged agency statements are rules by definition, which the Department denies. This argument will be addressed in the legal conclusions below. For the moment, it is sufficient to note that the Department’s position fails to persuade if, as United contends, United’s base rates in fact are not prospectively loaded with a CAT Fund Factor. If United is correct about the composition of its base rates, then it has suffered a substantial injury-in-fact as a result of the Department’s irrebuttable presumption that, unless an insurer is already recouping, its base rates are prospectively loaded. The Department’s standing argument thus implicates, at least to a limited extent, the merits of United’s claim to be entitled to recoup fully the reimbursement premiums it has paid. In view of the need to address this issue without foreclosing or encroaching upon the parties’ respective rights to a full hearing on the merits of United's alleged injury in the appropriate forum, the findings of fact herein on this particular subject are expressly limited so as not to reach beyond the standing issue at hand. Except as specifically decided here, the question whether United’s base rates are prospectively loaded with a CAT Fund Factor is left for, and will need to be litigated fully in, Case No. 4212, which is the proper vehicle for its ultimate resolution on the merits. That said, there is and can be no dispute that United's base rates, as established in its initial rate filings, include a Recoupment Surcharge — of zero. The Premium Calculation Worksheet that United submitted for its homeowners rate filing, in the section dealing with "mandatory additional charges," expressly provides that the CAT Fund Recoupment Surcharge shall be "0." Petitioner’s Exhibit 1. So, too, does the Premium Calculation Worksheet for United's dwelling fire rate filing. Respondent's Exhibit 1. 19/ In his March 3, 1999, cover letter to the Commissioner of Insurance regarding United's homeowners rate filing, United's consultant Mr. Trafton pointed this fact out, explaining: "This [premium calculation] worksheet has been revised to remove, for now, any Assessments for FHCF . . . ." Respondent's Exhibit 1. Mr. Trafton made a similar comment in his cover letter of the same date regarding United's dwelling fire rate filing. Respondent’s Exhibit 1. That United's initial rate filings set a Recoupment Surcharge of zero is consistent with its position that its base rates are not prospectively loaded with a CAT Fund Factor. At the time United made these rate filings, after all, it had paid zero in reimbursement premiums and had nothing to recoup; thus, zero was the most accurate (indeed the only true) number to submit in connection with a Recoupment Surcharge calculation. For that reason, United's representation, in its initial base rate filings, that the amounts to be recouped initially equaled zero cannot be considered the equivalent of a declination of the right to use the recoupment method of recovering CAT Fund premiums. At a minimum, United's filing can reasonably be interpreted as having left the door open to adjusting the stated surcharge of zero to a positive number after reimbursement premiums had been paid, when there would be something to recoup. While not establishing the fact directly, this does raise an inference that United's rates are net of expected CAT Fund recoveries. 20/ This inference was supported by other evidence. Mr. Stuart testified that United had removed the "recoupment charge" from its initial rate filings at the direction of the Department, on the ground that United had not yet paid any reimbursement premiums to the CAT Fund. He also stated that at the time of United's initial rate filings, the company believed that reimbursement for CAT Fund premiums would be achieved on a retrospective basis, using a surcharge to base rates. It was Mr. Stuart's understanding that United's base rates did not include a "CAT Fund recoupment." T-67. Mr. Trafton testified that Mr. Roddenberry had told him in late 1998 that United could not use the "catastrophe protection surcharge that was in the 1998 FRPC JUA rates." T-86. To Mr. Trafton, this meant that United was required to use the FRPCJUA's 1997 base rates because "it goes without saying, if . . . you can't use the catastrophe protection surcharge, you're not using the '98 rates, you're using the '97 rates." T-86. Mr. Trafton testified that as far as he could recall, United's base rates did not "include any credit or factors for expected premiums to be paid to the Catastrophe Fund." T-94. The testimony of Mr. Stuart and Mr. Trafton on the issue of whether United's base rates are prospectively loaded was not rebutted by the Department at hearing (perhaps because the Department conclusively presumes that United's rates are prospectively loaded). But at the same time, their testimony did not directly answer the question whether the 1997 FRPCJUA rates that United adopted were prospectively loaded — a proposition that does not follow necessarily from the premise (which is undisputed) that United's Recoupment Surcharge, as filed, was zero. 21/ Mr. Trafton in particular left the impression that the FRPCJUA's 1997 rates were net of expected CAT Fund recoveries, but he did not say so unambiguously. The conclusion can be deduced from his testimony, but not without difficulty. When Mr. Trafton said that United could not use the "catastrophe protection surcharge" that was "in" the 1998 rates, he might have been referring to a charge that was "built into" (i.e. prospectively loaded in) those rates. 22/ If so, then Mr. Trafton appears to have said (by making it clear that he and the Department perceived a material difference between the two years) that the 1997 rates were not prospectively loaded. (This raises the interesting possibility, not addressed in this record, that the FRPCJUA needed to impose a Recoupment Surcharge in 1998 to recover the past year's reimbursement premiums at the same time it was prospectively loading its base rates to recover in advance for the reimbursement premiums yet to be paid. See endnote 9.) If, on the other hand, Mr. Trafton meant that the FRPCJUA's 1998 rates included a "catastrophe protection surcharge" in addition to the base rates (as a retrospective means of collecting for reimbursement premiums paid), then the implication would be that the 1997 rates were net of expected CAT Fund recoveries, because otherwise the FRPCJUA's recoupment in 1998 would amount to a double recovery. But if this were the case, it is not clear why United could not have used the FRPCJUA's 1998 base rates, which presumably would have been net of expected CAT Fund recoveries, too — unless in 1998 the FRPCJUA were recouping for 1997 reimbursement premiums and also collecting prospectively for 1999 reimbursement premiums, in transition from the recoupment method to the prospective method of recovery. If the assumption is made for argument's sake that the FRPCJUA's 1997 rates were prospectively loaded (from which would follow the conclusion that United's “me-too” rates are prospectively loaded), then it becomes difficult to make sense of Mr. Trafton's and Mr. Stuart's testimony. In that event, the FRPCJUA's 1998 rates could not have included a Recoupment Surcharge (or at least not a full one, see endnote 8). The 1998 rates would have been either net of expected CAT Fund recoveries (in transition from the prospective method to the recoupment method) or prospectively loaded as in 1997. Consequently, the 1997 base rates would have been, respectively, either higher or approximately the same as the 1998 base rates. Not only would either possibility seem to leave no plausible reason for the Department to have directed United to use the 1997 base rates, but also these scenarios contradict the testimony of both Mr. Stuart and Mr. Trafton, each of whom suggested that the 1997 base rates were less generous than the rates in effect in 1998. In sum, the present record establishes that, more likely than not, the FRPCJUA's 1997 base rates were, and therefore United's base rates are, net of expected CAT Fund recoveries. In other words, United's rates are probably not prospectively loaded with a CAT Fund Factor, contrary to the Department's presumption. As explained above, however, the resolution of this case does not demand that a definitive finding of fact be made on this issue. It is enough, for now, to find that United has proved by a preponderance of evidence a reasonable likelihood that, given the opportunity (which it will have in Case No. 00-4212), it can successfully demonstrate that its rates are not prospectively loaded. No more than that is being found at this time. Whether United will succeed on the merits of its claim to be entitled to recoup reimbursement premiums paid to the CAT Fund remains to be seen; nothing decided here is intended to pre-determine the outcome of Case No. 00-4212.
Findings Of Fact Respondent Judy Louise Robinson is currently licensed by the Florida Department of Insurance as a general lines agent, a health agent, and a dental health agent and has been so licensed since November 21, 1984. At all times material, Respondent engaged in the business of insurance as Fleming Island Insurer. At all times material, Respondent maintained two business bank accounts in the name of Fleming Island Insurer: Account No. 1740043215 at Barnett Bank in Orange Park and Account No. 11630004614 at First Union Bank, Park Avenue Office. First Union Bank is currently First Performance Bank. All funds received by Respondent from or on behalf of consumers, representing premiums for insurance policies, were trust funds received in a fiduciary capacity and were to be accounted for and paid over to an insurer, insured, or other persons entitled thereto in the applicable regular course of business. Respondent solicited and procured an application for a workers' compensation insurance policy from Linda Smith on September 13, 1989, to be issued by CIGNA. Respondent quoted Ms. Smith an annual workers' compensation premium of two thousand six hundred four dollars and forty cents ($2,604.40). Linda Smith issued her check payable to Fleming Island Insurer in the amount quoted by Respondent on September 13, 1989, as premium payment for the CIGNA workers' compensation insurance coverage. On September 14, 1989, Respondent endorsed and deposited Linda Smith's $2,604.40 check into Fleming Island Insurer's business bank account No. 1740043215 at Barnett Bank, Orange Park, Florida. On September 17, 1989, Respondent forwarded her check in the amount of two thousand six hundred eighty nine dollars and forty cents ($2,689.40) to NCCI ATLANTIC for issuance of a workers' compensation policy with CIGNA for Linda Smith, Inc. The difference between the amount paid to Respondent by Linda Smith ($2,604.40) and the amount paid by Respondent to CIGNA via NCCI ATLANTIC ($2,689.40) amounts to $85.00 advanced by Respondent because she misquoted the premium amount to Linda Smith. On September 17, 1989, Respondent notified Linda Smith that another $85.00 was due. Linda Smith never paid this amount to Respondent. On September 19, 1989, CIGNA issued a workers' compensation policy for Linda Smith, Inc. Respondent's check was thereafter returned to CIGNA due to insufficient funds. On or about October 20, 1989, CIGNA notified Respondent that her agency check had been returned as unpayable and requested substitute payment within ten days to avoid interruption in Linda Smith, Inc.'s workers' compensation insurance coverage. Respondent asserted that she was injured in an automobile accident on October 1, 1989 and could not work through July of 1990 due to chronic dislocation of her right arm, but she also asserted that she never closed her insurance business and operated it out of her home. Respondent's home is the address at which CIGNA notified her on October 20, 1989 concerning Ms. Smith's policy. Respondent failed to timely submit substitute payment to CIGNA, and as a result, Linda Smith, Inc.'s policy was cancelled January 1, 1990. On January 4, 1990, Linda Smith forwarded her own check in the full amount of $2,689.40 directly to CIGNA and her policy was reinstated. Respondent did not begin to repay Linda Smith the $2,604.40 proceeds of Linda Smith's prior check paid to Respondent until May 1991. At formal hearing, Respondent maintained that she was never notified that Linda Smith paid for the policy a second time. Even if such a protestation were to be believed, it does not excuse Respondent's failure to account to either Linda Smith or CIGNA for the $2,604.40, which Respondent retained. Respondent also testified that Barnett Bank's failure to immediately make available to Respondent the funds from Linda Smith's check, which cleared, resulted in Barnett Bank reporting to CIGNA that there were insufficient funds to cover Respondent's check to CIGNA. From this testimony, it may be inferred that Respondent knew or should have known that she owed someone this money well before May 1991. On November 11, 1989, Lewis T. Morrison paid the Traveler's Insurance Company six thousand forty-three dollars ($6,043.00) as a renewal payment on a workers' compensation policy for Morrison's Concrete Finishers for the policy period December 30, 1988 through December 30, 1989. At the conclusion of the 1988-1989 policy period, Traveler's Insurance Company conducted an audit of Morrison's Concrete Finishers' account. This is a standard auditing and premium adjustment procedure for workers' compensation insurance policies. It is based on the insured's payroll and is common practice in the industry. This audit revealed that Morrison's Concrete Finishers was due a return premium of two thousand one hundred fifty-three dollars and eighty- seven cents ($2,153.87) from the insurer. On March 30, 1990, Traveler's Insurance Company issued its check for $2,153.87 payable to Fleming Island Insurer. This check represented the return premium due Morrison's Concrete Finishers from Traveler's Insurance Company. On April 6, 1990, Respondent endorsed and deposited Traveler's Insurance Company's return premium check into the Fleming Island Insurer's business bank account No. 11630004614 at First Union Bank. The standard industry procedure thereafter would have been for Respondent to pay two thousand two hundred forty-eight dollars ($2,248.00) via a Fleming Island Insurer check to Morrison's Concrete Finishers as a total returned premium payment comprised of $2,153.87 return gross premium from Traveler's Insurance Company and $94.13 representing her own unearned agent's commission. When Respondent did not issue him a check, Lewis T. Morrison sought out Respondent at her home where he requested payment of his full refund. In response, Respondent stated that she would attempt to pay him as soon as she could, that she was having medical and financial problems, and that the delay was a normal business practice. Respondent testified that on or about April 19, 1990, in an attempt to induce Mr. Morrison to renew Morrison's Concrete Finishers' workers' compensation policy through Fleming Island Insurer, she offered him a "credit" of the full $2,248.00 owed him. Pursuant to this offer of credit, Respondent intended to pay Traveler's Insurance Company or another insurance company for Morrison's Concrete Finisher's next year's premium in installments from Fleming Island Insurer's account. This "credit" represented the return premium Respondent had already received from Traveler's Insurance Company on behalf of Morrison's Concrete Finishers for 1988-1989 which she had already deposited into Fleming Island Insurer's business account. Whether or not Mr. Morrison formally declined Respondent's credit proposal is not clear, but it is clear that he did not affirmatively accept the credit proposal and that he declined to re-insure for 1989-1990 through Respondent agent or Traveler's Insurance Company. Respondent still failed to pay the return premium and commission which she legitimately owed to Morrison's Concrete Finishers. On June 28, 1990, the Traveler's Insurance Company issued a check directly to Mr. Morrison for the full amount of $2,248.00. Respondent did not begin repaying Traveler's Insurance Company concerning Mr. Morrison's premium until after intervention by the Petitioner agency. At formal hearing, Respondent offered several reasons for her failure to refund the money legitimately due Mr. Morrison. Her first reason was that the district insurance commissioner's office told her to try to "work it out" using the credit method outlined above and by the time she realized this method was unacceptable to Mr. Morrison, he had already been paid by Traveler's Insurance Company. However, Respondent presented no evidence to substantiate the bold, self-serving assertion that agency personnel encouraged her to proceed as she did. Respondent also testified that she did not know immediately that Traveler's Insurance Company had reimbursed Mr. Morrison directly. However, it is clear she knew of this payment well before she began to pay back Traveler's, and since Mr. Morrison did not reinsure through her or Traveler's she should have immediately known the "credit" arrangement was unacceptable to him. Respondent further testified that she did not want to repay Mr. Morrison until a claim on his policy was resolved. However, there is competent credible record evidence that the Traveler's Insurance Company 1988-1989 workers' compensation policy premium refund was governed solely by an audit based on payroll. Mr. Morrison's policy premium or refund consequently was not governed by "loss experience rating", and the refund of premium would not be affected by a claim, open or closed. Thus, the foregoing reasons given by Respondent for not refunding Mr. Morrison's money are contradictory or not credible on their face. They also are not credible because Respondent admitted to Mr. Morrison in the conversation at her home (see Finding of Fact 24) that she was having trouble paying him because of medical and financial difficulties. Further, they are not credible because Respondent testified credibly at formal hearing that she would have paid Mr. Morrison but for her bank account being wiped out by a fraudulent check given her by an unnamed third party. On August 10, 1992, Respondent was charged by Information with two counts of grand theft. See, Section 812.014(2)(c) F.S. The allegations in the Information charged Respondent with theft of insurance premiums from Linda Smith and Lewis T. Morrison, and arose out of the same facts as found herein. On December 17, 1992, Respondent entered a nolo contendere plea to only the first count of grand theft as to matters involving Linda Smith and the other count was "null prossed." Respondent secured a negotiated sentence on the first count. "Grand theft" is a felony punishable by imprisonment by one year or more. Adjudication was withheld pending satisfactory completion of probation, including community service and payment of restitution and court costs. Respondent has been complying with her probation, including restitution payments.
Recommendation Upon the foregoing findings of fact and conclusions of law, it is recommended that the Department of Insurance enter a final order finding Respondent guilty of violations of Sections 626.561(1), 626.611(7), (9), (10), and (13); 626.621(2) and (6) F.S. under Count I, violations of Sections 626.561(1), 626.611(7), (9), (10), and (13), and 626.621(2) and (6) under Count II, and violations of Sections 626.611(14) and 626.621(8) F.S. under Count III, finding Respondent not guilty of all other charges under each count, and revoking Respondent's several insurance licenses. RECOMMENDED this 23rd day of June, 1993, at Tallahassee, Florida. ELLA JANE P. DAVIS Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 23rd day of June, 1993. APPENDIX TO RECOMMENDED ORDER 92-2060 The following constitute specific rulings, pursuant to S120.59(2), F.S., upon the parties' respective proposed findings of fact (PFOF). Petitioner's PFOF: As modified to more correctly reflect the whole of the record evidence and avoid unnecessary, subordinate, or cumulative material, all of Petitioner's proposed findings of fact are accepted. Respondent's PFOF: Sentence 1 is accepted as a paraphrased allegation of the Second Amended Administrative Complaint. Sentence 2 is covered in Findings of Fact 4-18. Sentence 3 is accepted but subordinate and to dispositive. Sentence 4 is apparently Respondent's admission that she owed $2,604.40 to Linda Smith and paid her $500.00 of it. Accepted to that extent but not dispositive in that full payment was not made timely. Sentence 1 is accepted as a paraphrased allegation of the Second Amended Administrative Complaint but not dispositive. Sentence 2 is accepted but immaterial. Sentence 3 is rejected as argument and not dispositive. As stated, the proposal also is not supported by the record. Sentence 4 It is accepted that Mr. Morrison admitted he had a claim. However, the record does not support a finding that he requested Respondent to contact Traveler's Ins. Co. about it. Even if he had, that is subordinate and not dispositive of the ultimate material issues. Sentence 5 is rejected as not supported by the credible record evidence. Covered in Findings of Fact 23-28. Sentence 6 is rejected as not supported by the record and as argument. Sentence 7 Accepted. Sentence 8 Accepted. The "Descriptive Narrative" is accepted through page 4, but not dispositive. Beginning with the words "In summary" on page 5, the remainder of the proposal is not supported by the record in this cause which closed April 16. 1993. COPIES FURNISHED: Daniel T. Gross, Esquire Division of Legal Services Department of Insurance and Treasurer 412 Larson Building Tallahassee, FL 32399-0300 Judy Louise Robinson 4336 Shadowood Lane Orange Park, FL 32073-7726 Tom Gallagher State Treasurer and Insurance Commissioner Department of Insurance and Treasurer The Capitol, Plaza Level Tallahassee, FL 32399-0300 Bill O'Neil General Counsel Department of Insurance and Treasurer The Capitol, PL-11 Tallahassee, FL 32399-0300
The Issue The issue in this case is whether Respondent, Bobbie Lynn Teddlie, Jr., should be disciplined on charges that he violated various provisions of the Insurance Code in connection with the replacement of an 82-year-old's retirement investments with an annuity.
Findings Of Fact Respondent, Bobbie Lynn Teddlie, Jr., is a Florida- licensed life insurance agent, life and health insurance agent, health insurance agent, and life and health variable annuity contracts salesman. He is not licensed to sell or broker securities. There was no evidence that Respondent previously was subject to license discipline. In May 1998, while he was employed with Senior Estate Services, Respondent visited Genevieve Rathje, an 82-year-old widow and retiree, for purposes of delivering a revocable living trust prepared at her request, having it executed, and listing Rathje's assets that would be subject to the trust. Rathje's 40- year-old son, Larry, one of two beneficiaries under her estate planning arrangements, was at her home when the documents were delivered. After delivery and execution of the trust, Rathje's assets were discussed; they included an Edward Jones securities account, a COVA Financial Life Insurance Company (COVA) annuity, and a SunTrust account. Rathje mentioned that she was not happy about the market risk and fluctuations in the value of the Edward Jones account. Her son concurred. They showed Respondent some recent Edward Jones statements showing the fluctuations and some negative returns. In discussing their concerns, Respondent compared the Edward Jones account to the COVA annuity, with its guaranteed rates of return. Ultimately, Rathje and her son both stated that they preferred the annuity investment. (According to Rathje's deposition testimony, she also had been advised by an estate planning attorney to replace her Edward Jones account, which would be subject to probate on her death, with an annuity.) Respondent then presented an American Investors Life Insurance (American Investors) annuity offered by Senior Estate Services. Rathje and her son decided to liquidate and replace her investments, less approximately $30,000 for capital gains taxes and purchase of a new condominium, with an American Investors annuity. There was no evidence that Respondent misrepresented the American Investors annuity to Rathje or her son; to the contrary, there was convincing evidence that there were no misrepresentations. Nor was there any convincing evidence that Respondent made any misrepresentations to induce Rathje to liquidate her investments to purchase the American Investors annuity. To facilitate the transaction, Respondent arranged to have Rathje's Edward Jones account liquidated through Financial West Group (Financial West), a California securities broker associated with Senior Estate Services. There was no convincing evidence that Respondent made these arrangements against the wishes of Rathje and her son, or without their knowledge and approval. There was no evidence that either Rathje or her son had any complaint about the use of Financial West. Respondent also had Respondent cash in the COVA annuity, less surrender charges. The proceeds, less approximately $30,000 for capital gains taxes and the new condominium, were used to purchase an American Investors annuity. Less than 30 days later, Senior Estate Services went out of business, and Respondent obtained employment with Professional Insurance Systems. Respondent decided to replace the American Investors annuity because his commission was being held, and Respondent did not think it ever was going to be paid to him. In his new employment, Respondent was able to offer Rathje a United Life and Annuity Insurance Company (United Life) annuity, which was superior to the American Investors annuity in several respects. Since the 30-day "free look" period on the American Investors annuity had not yet expired, it was possible to replace it with a United Life annuity without any penalty or surrender charge. Respondent returned to Rathje's home with a more experienced Professional Insurance Systems agent named Phil Mednick to offer the United Life annuity and compare it to the American Investors annuity. Rathje's son was there to participate in his mother's decision, since he was a beneficiary. Respondent's presentation persuaded Rathje and her son that the United Life annuity was superior to the American Investors annuity. Arrangements were made to rescind the American Investors annuity for a full refund and replace it with a United Life annuity. (Respondent's commission on the sale of the American Investors annuity was reversed, so Respondent received no additional compensation by replacing the American Investors annuity with the United Life annuity. To the contrary, he had to split the commission on the United Life annuity with Mednick-- $4,500 each.) At Rathje's request, it was arranged for United Life to pay her monthly interest checks in the amount of $200 (according to Respondent) prior to the "Annuity Commencement Date" (July 28, 2008). There was no evidence that Respondent made any misrepresentations in comparing the two annuities. Two weeks later, Respondent and Mednick returned to Rathje's home to deliver the United Life annuity. Rathje's son, Larry, was there again. During this visit, Rathje expressed dissatisfaction with her IRA account at SunTrust. Respondent and Mednick told them about a Life USA Fixed Index Annuity. Rathje and her son agreed that it was better than the SunTrust account, and arrangements were made to liquidate the SunTrust account and replace it with a Life USA Fixed Index Annuity. Since the IRA was being rolled over, there were no tax consequences. It is not clear from the evidence how or why the complaint against Respondent was filed. Neither Rathje's son, Larry, nor anyone from the Department of Insurance testified. Rathje's deposition testimony was unclear. Apparently, when she was having her income tax return prepared in 1999, she "got a little alarmed" when her "tax man" told her she had no money "in there" (presumably the Edward Jones account). This apparently led to a Department of Insurance inquiry into Respondent's role in these transactions and eventually to a complaint being filed by Rathje. Yet in her deposition, Rathje testified: "I didn't say [Respondent] did anything wrong. I'm not sure if he did." Asked in her deposition what she thought the problem was, Rathje answered: "I don't know. Why ask me?" Rathje also became upset when she requested $2,300 (presumably from United Life) to put new hurricane shutters on her house and, according to Rathje's deposition testimony, was told: "You're already getting $400 a month." (This statement does not make sense and never was explained by the evidence.) Apparently, one basis for the charges against Respondent was that Rathje was not made to understand that the United Life annuity was subject to its own terms regarding withdrawal of funds before the "Annuity Commencement Date," and related surrender charges. But the greater weight of the evidence was that Respondent explained all of this to both Rathje and her son. In addition, it was clearly explained in the annuity documents themselves. It was not proven that Respondent misled Rathje and her son with respect to withdrawal of funds and surrender charges under the United Life annuity. The other basis for the charges against Respondent was the Department's assertion that the liquidation of the Edward Jones account and COVA annuity and their replacement with the United Life annuity patently was to Rathje's financial detriment. (Respondent presented some evidence that the United Life annuity was better than the American Investors annuity, but the Department presented no evidence of the specifics of the American Investors annuity.) According to the March 1998 Edward Jones account statement, Rathje had assets with a total value of $171,329.56. Included in the account were several stock and bond mutual funds, taxable and non-taxable bonds, and a GNMA mortgage-backed security fund. Also reflected on the Edward Jones statement as being held outside Edward Jones was the COVA annuity. These assets are detailed in Findings 11 through 16. The Income Fund of America, Inc. and the Putnam Growth and Income Fund were funds consisting of a mix of stocks and bonds. The Income Fund of America, Inc. had a value of $17,132.97, an unrealized capital gain of $1,323.09, and an estimated annual yield of 4.26%. The Putnam Growth and Income Fund had a value of $15,055.70, an unrealized capital gain of $2,528.96, and an estimated annual yield of 1.59%. The Putnam High Yield Advantage Fund was a taxable bond fund with a current value of $25,928.17, an unrealized capital loss of $1,071.83, and an estimated annual yield of 9.4%. The Putnam Tax-Free Income Trust High Yield Fund was a non-taxable bond fund with a value of $28,131.57, an unrealized capital gain of $818.31, and an estimated annual tax-free yield of 4.88%. As a Class B fund, Rathje could have been assessed a sales charge on the sale of shares of this fund. There were two Van Kampen American Capital Municipal Income Funds. Both were tax-free municipal bond funds. One was a Class A fund, which charges an up-front load on the purchase of shares but no sales charge on the sale of shares; the other was a Class B, which did not charge an up-front load on the purchase of shares but imposed a charge on their sales. The Class A fund had a value of $7,314.69, and an estimated annual tax-free yield of 5.38%. The Class B fund had a value of $15,544.23 and an estimated annual tax-free yield of 4.65%. The unrealized gain or loss of the Van Kampen funds was stated as "not available," probably because the cost bases of the funds were not known. There was a municipal bond issued by the Metropolitan Sewer District of Walworth County, Wisconsin, which had current (maturity) value of $15,000, an unrealized gain of $708.75, and a tax-free yield of 6.3%. There also was a taxable corporate bond issued by the Philadelphia Electric Company with a current (maturity) value of $26,000, an unrealized capital loss of $1,007.50, and an estimated yield of 7.125%. The GNMA fund paid interest of 9.5%. It had a principal value of $1,000 but a current value of $990. The COVA annuity was a five-year fixed annuity in the amount of $10,000 with a current value of $17,814.28. It was issued on May 25, 1990, and was renewed five years later for a second five-year term. As of March 1998, it was paying 6% interest, tax-deferred; this appears to have been the interest rate for the five-year renewal period. The COVA annuity was subject to a 6% surrender charge and an interest (or market) adjustment. At the time the COVA annuity was liquidated, there was a net surrender charge of $780, after credit was given for a positive $202.08 interest adjustment. The United Life annuity ultimately purchased by Rathje also paid 6% interest, tax-deferred, but paid a 1% bonus in addition the first year. On the $120,000 annuity purchased by Rathje, the bonus was worth a total of $1,200. After the first year, interest was subject to adjustment annually but was guaranteed not to fall below 4%. Surrender charges were 10% in the first year, decreasing 1% each year until the eighth year, to 3%, where it would remain until eliminated in year 11. Contrary to the Department’s argument, it was not patently against Rathje’s financial interest to liquidate the Edward Jones investments and replace them with cash (for capital gains taxes and a new condominium) and the United Life annuity. While some of the Edward Jones investments were performing well (and arguably better than the United Life annuity) at the time, it is not clear that all of them were performing that well, and all of them were subject to market fluctuations. Two of the investments were showing unrealized capital losses in March 1998. (Even the individual bonds were subject to the market on a sale before their maturity; the return of the principal only was guaranteed if held until maturity.) It was not patently unreasonable for Rathje to resort to an annuity to reduce her exposure to losses if the market went down. It certainly was not so obvious that the transaction was contrary to Rathje’s financial interests that Respondent, who was not an expert in securities investing, should have refused to participate. Less easily explained was the decision to liquidate the COVA annuity, at a loss of $780 in net surrender charges (after credit for the interest adjustment.) Even taking into account the United Life annuity’s one-time 1% bonus, this only resulted in $174 on the $17,418.77 net surrender value of the COVA annuity on August 5, 1998, for a net loss of approximately $606 on the exchange. It would be five years before the surrender charge on the United Life annuity fell to the 6% surrender charge on the COVA annuity; by that time, the COVA renewable term would have expired, and the value of the COVA annuity could have been reinvested at no surrender charge. There was no basis in the evidence to predict the interest adjustment on the COVA annuity if liquidated later but before expiration of the renewal period. The only apparent financial reason to prefer the exchange of annuities would have been the potential for the United Life annuity to pay more than 6% (on the assumption that the COVA annuity was locked-in at 6% until expiration of the renewal period.) But there also was the potential for the United Life annuity’s interest to decrease to the guaranteed floor of 4%, and preference for such market sensitivity would have run counter to Rathje’s primary stated objective of eliminating market fluctuations. The only other logical reason for Rathje to liquidate the COVA annuity and replace it with United Life would have been to reduce the number of her investments to just one. Respondent testified that Rathje and her son indeed expressed such a desire. Although Respondent omitted this claim in his written statement to the Department (Petitioner's Exhibit 2), there was no evidence to the contrary. In the absence of any coherent complaint by Rathje or her son, Respondent's testimony is accepted as a valid explanation for Respondent's participation in the liquidation of the COVA annuity, even at a net cost of $606. As a result, not only was the evidence insufficient to prove intent to defraud or misrepresent, it also was insufficient to prove negligent analysis of the transaction and improper advice to Rathje. A fortiori, the evidence was insufficient to prove lack of fitness, incompetence or untrustworthiness.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Insurance enter a final order finding Respondent, Bobbie Lynn Teddlie, Jr., not guilty of the charges alleged in the Administrative Complaint. DONE AND ENTERED this 25th day of May, 2000, in Tallahassee, Leon County, Florida. J. LAWRENCE JOHNSTON 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 25th day of May, 2000. COPIES FURNISHED: James A. Bossart, Esquire Department of Insurance 200 East Gaines Street 612 Larson Building Tallahassee, Florida 32399-0333 Stacey L. Turmel, Esquire 412 East Madison Street, Suite 803 Tampa, Florida 33602 Bill Nelson State Treasurer and Insurance Commissioner Department of Insurance The Capitol, Plaza Level 2 Tallahassee, Florida 32399-0300 Daniel Y. Sumner, General Counsel Department of Insurance The Capitol, Lower Level 26 Tallahassee, Florida 32399-0300
The Issue The issues for consideration are those promoted by an administrative complaint brought by the Petitioner against the Respondent in which the Petitioner alleges that the Respondent has violated various provisions of the insurance code, Chapter 626, Florida Statutes, in conducting business in Florida under licenses held with the Petitioner agency. The particulars of the administrative complaint are more completely set forth in the conclusions of law section to this recommended order.
Findings Of Fact Petitioner's exhibit 1 admitted into evidence is a document from Bill Gunter, Insurance Commissioner and Treasurer for Florida, announcing that the Petitioner, State of Florida, Department of Insurance and Treasurer, has records pertaining to the Respondent, Terry Vernon Smith, about his residence and business addresses. Those addresses are respectively, 4000 Southwest 5th Avenue, Ocala, Florida, 32670, and Silver Point Complex, Northeast 3rd Street and Silver Springs Boulevard, Ocala, Florida, 32670, effective April 9, 1979. Effective April 8, 1980, those addresses are, respectively, 4000 Southwest 5th Avenue, Ocala, Florida 32670, and 3423 Northeast Silver Springs Boulevard, Suite 5, Ocala, Florida 32670. At times relevant to the administrative complaint, Respondent was an independent insurance agent representing Nationwide Insurance in Florida. At times relevant to the administrative complaint, Respondent financed insurance premiums through Premium Service Company of Florida, Jacksonville, Florida. In this process, Respondent received from the insuring companies or through their managing or general agents, certain unearned refunds associated with three of the four contracts that the Premium Service Company of Florida had financed. That company attempted on numerous occasions to have those refunds given to it to make the company, Premium Service Company of Florida, whole concerning its exposure as finance agent for the insurance premiums. Eventually it was necessary for Premium Service Company of Florida to secure the assistance of the Petitioner agency to try to rectify the problem with the Respondent pertaining to the refunds. There was also a problem in which Respondent was responsible for paying over an unearned commission to the finance company in order to resolve a remaining balance in a customer account of Premium Service Company of Florida which had been financed by Premium Service Company of Florida. The details of the resolution of these problems with Respondent are set forth in the succeeding discussion. In the transactions involving Premium Service Company of Florida, Respondent would use that organization for premium financing by utilizing application materials furnished by the finance company. He would have the customers sign one of Premium Service Company of Florida's finance agreements in order to secure part of the payment of the premium. The finance company would prepay the premium to the insuring company on behalf of the customer to place the insurance in effect and the customers were to reimburse Premium Finance Company a monthly amount to satisfy the finance debt. One of the individuals who sought Premium Service Company of Florida's assistance in financing his insurance premium was William C. Erney. The details of that finance agreement are set forth in the composite Petitioner's Exhibit 3 admitted into evidence. On October 24, 1983, Erney completed a premium finance agreement with the Respondent's insurance agency which was known as Terry V. Smith Insurance Agency. Erney paid down $127 and financed an additional $236 through the Premium Service Company of Florida. The premium finance company was due the $236 borrowed plus documentary stamp charges and finance charges for the use of their money. The total amount to be reimbursed was $270.60. Six equal installments were to be paid at $45.10 per month starting on November 24, 1983, for Erney to satisfy his indebtedness to Premium Service Company of Florida. Erney did not make the installment payments, and as a consequence the premium finance company issued a notice of cancellation to the insuring company. The policy was cancelled effective November 24, 1983. This left the gross amount of unearned premium as $277. The net unearned refund in the policy was $242.38, which the insuring company sent to the Respondent on February 24, 1984. Respondent needed to add his unearned commission of $34.60 to the $242.38 in order to make the premium service company whole in the amount owed to it, which was $277. This total amount was not satisfied until after the premium service company had complained to the Petitioner agency on October 19, 1984, on the subject of Respondent's tardiness in remitting the $277 to the finance company. The payment which satisfied the Erney account outstanding with Premium Service Company of Florida came about on November 16, 1984, when Respondent paid that item off, together with others which will be subsequently discussed. A copy of the check paying off the account may be found as part of Petitioner's composite Exhibit 7 admitted into evidence. From March 1984 until receipt of its money in the Erney account in November 1984, the premium finance company made proper demands of the Respondent's insurance agency on a monthly basis, without positive results. On May 13, 1983, Herbert Holt bought insurance through the Respondent's insurance agency. The details of that purchase may be found in Petitioner's composite Exhibit 4 admitted into evidence. The purchase price of the insurance was $246 with a cash downpayment of $86. One hundred sixty dollars of the premium was financed through Premium Service Company of Florida, together with documentary stamps and a finance charge. Holt was to pay six equal installments of $31.65 beginning June 15, 1983, in order to pay off his financing arrangement with Premium Service Company of Florida. Holt did not honor the terms of his contract for repayment to the Premium Service Company of Florida, causing the cancellation of the policy effective October 23, 1983. That left owning to the premium finance company $76.46 for unearned refund. One hundred thirty-one dollars, the amount of gross unearned premium, had been credited to Respondent's agency effective October 1983. The premium finance company did not get its $76.46 refund from the Respondent's company until November 1984. On June 9, 1983, Edna A. Irmie purchased insurance from the Respondent's insurance agency. The cost of the policy was $299 with a cash downpayment of $104 and an unpaid balance financed in the amount of $195 plus documentary stamps and finance charges by Premium Service Company of Florida. The agreement between the premium service company and the purchaser of insurance was for a payment of six installments in the amount of $37.86 beginning July 9, 1983. The particulars of this purchase may be found in Petitioner's composite Exhibit 5 admitted into evidence. Ms. Irmie did not honor her agreement for payment of the installments in accordance with the repayment schedule, and on October 5, 1983, a notice of cancellation was issued by Premium Service Company of Florida, requesting cancellation due to nonpayment of the premium financing. The insuring company effected the cancellation on October 19, 1983, and returned a gross unearned premium in the amount of $191 to the Respondent's insurance agency in October 1983. The balance owed to the premium finance company from Respondent for its participation in the finance of the Irmie insurance was $161.44. That remittance was not presented to the premium finance company until November 1984. On June 30, 1983, D. N. S. Sharma, d/b/a Country Cupboard, purchased insurance from the Respondent's agency in which the price of the insurance was $1,003.50. Petitioner's composite Exhibit 6 admitted into evidence contains the details of this purchase. Three hundred fifty-three dollars and fifty cents was paid down and $650 plus documentary stamps and finance charges were financed through the Premium Service Company of Florida concerning this purchase of insurance. The insurance consumer was to pay six equal installments in the amount of $118.35 beginning August 1, 1983. None of the scheduled installment payments were paid, and on August 30, 1983, notice of cancellation was issued to the insurance company requesting cancellation for nonpayment of the premium financing. On October 5, 1983, $558 was received by Premium Service Company of Florida related to net unearned premiums/refund. The balance owed by Sharma related to the insurance premium financing was $720.10. This left a deficit in the amount of $77.13 which was due the finance company from the Respondent's unearned commission. That money from the Respondent was not received until November 1984 as a part of the settlement of all the aforementioned premium finance cases. The balance of the money owed to the premium service company, $720.10, excluding the net unearned refund and the Respondent's unearned commission, was written off as a bad debt loss when the Premium Service Company was unable to get the purchaser to pay the difference between $720.10 and the $635.51 collected in the two categories described. The settlement check was written in the amount of $592.03, which is set forth in Petitioner's Exhibit 7 admitted into evidence. In the Petitioner's composite Exhibit 7 which includes a copy of the check satisfying the Premium Service Company of Florida on the various accounts set forth recently, there is a copy of the letter which accompanied the check, and in this letter Smith acknowledges the lateness of payment in these accounts. His acknowledgment is confirmation of inordinate and unacceptable delay in the payment of monies to Premium Service Company of Florida which should have been presented much earlier. Respondent, in his association with Nationwide Insurance, was involved with that affiliation for seven years. During that time, his supervisor from Nationwide Insurance was Kenneth Collett. As established by the witness Collett, on September 20, 1985, Linda L. Humbertson purchased automobile insurance through the Respondent's agency from Nationwide Insurance. She paid $103.10 for the policy. That policy was later cancelled for nonpayment of the premium, when in fact Ms. Humbertson had paid the $103.10 for the insurance premium to Respondent's insurance agency. Petitioner's exhibit 8 admitted into evidence contains a receipt dated September 20, 1985, in the amount of $103.10 pertaining to the automobile insurance purchased by Humbertson and signed with the Respondent's name as receiving those moneys. What had happened in this instance is that Humbertson had renewed her insurance with Nationwide by paying the premium payment to Respondent's agency and that money had not been remitted to Nationwide. According to Collett, and his testimony is accepted, it was incumbent upon Respondent in the ordinary course of business to send the premium payment to Nationwide as Respondent had done in the past; however, in this situation with Humbertson, Respondent did not remit as required. Subsequently, Humbertson's policy which had been cancelled was reinstated and Respondent's account on commissions with Nationwide was debited for future commissions earned to make up the $103.10. On December 11, 1984, Econsul Corporation of Ocala, Florida, purchased a workers compensation policy from the Respondent's agency through Nationwide. The $785 check paid to the Respondent's agency may be found as Petitioner's exhibit 10. Respondent never submitted the application for the workers compensation insurance after completing the application form, nor the check related to the insurance purchase. This circumstance was later discovered by Collett. The consequence of the failure to submit the application form was that Econsul was without workers compensation coverage from December 11, 1984, through August 2, 1985. The Econsul premium payment of $785 was placed in the checking account of Respondent's insurance agency. On October 28, 1985, and again on November 7, 1985, Collett, in behalf of Nationwide, inquired of the Respondent concerning the whereabouts of the check from Econsul for workers compensation benefits. Respondent did not reply to these letters. The letters are set out in Petitioner's composite Exhibit 9 admitted into evidence. Subsequently, Nationwide Insurance Company charged a minimum premium to Econsul to comply with the laws related to workmen's compensation and refunded the balance of its premium payment, Econsul having made other arrangements for workmen's compensation insurance. The money which was associated with the coverage for Econsul in the requisite period for compliance with workmen's compensation was charged against the commission account of the Respondent, thereby satisfying the demands of Nationwide. From the evidence presented, it is inferred that Respondent is licensed by Petitioner to sell insurance in Florida.
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.
Findings Of Fact Respondent administers Florida's Medical Assistant Program (Medicaid Program) which is jointly funded by the state and federal government under Title XIX of the Social Security Act. Under the Medicaid Program, eligible recipients receive services from providers who voluntarily participate in the program. Under the Medicaid Program, Respondent is required to reimburse providers only reasonable costs, not all costs incurred. Petitioner is a licensed Florida nursing home facility and at all times material hereto, was certified to and was participating in the Medicaid Program. Participation in the program is subject to all State and Federal laws, regulations, standards and guidelines relating to medicaid. The methodology for determining reimbursement to a nursing home such as Petitioner under the Medicaid Program is set forth in the Title XIX Long-Term Care Reimbursement Plan (Gainesville Plan) which is incorporated by reference in Rule 10C-7.0482, Florida Administrative Code. The validity of the amended rule is not being challenged in this proceeding, only its application to Petitioner. Prior to implementation of the Gainesville Plan on April 1, 1983, Medicaid's reimbursement to nursing homes was more restrictive. The Gainesville Plan resulted from settlement of a lab suit challenging the reasonableness of reimbursement to nursing homes. The Gainesville Plan as implemented on April 1, 1983, placed ceilings on the reimbursement for operating and patient care costs but not reimbursement for property costs. In 1982 Petitioner ended years of litigation when it won approval to build a nursing home without a certificate of need. Due to the extended litigation, Petitioner lost an earlier financing arrangement which, due to the then existing economic conditions, resulted in the Petitioner being forced to seek financing for the construction of the nursing home through the issuance and sale of Industrial Development Revenue Bonds authorized pursuant to City of Gainesville, Florida Resolution R- 82-13 of January 13, 1982. Under the terms of the bond issue, the facility cannot be leased, resold or refinanced before 1990 and, therefore, Petitioner is still paying the "high rate" of interest negotiated in 1982. In determining the financial feasibility of the nursing home, the auditors preparing the bond documents based their calculations on the more restrictive reimbursement methodology for Medicaid which was in effect before the Gainesville Plan. Petitioner was projecting a forty per cent (40 percent) Medicaid utilization and the bond documents warned investors of the possibility of changes in the Medicaid Program. The present Medicaid utilization is in excess of eighty per cent (80 percent) At the time it financed the nursing home, Petitioner was aware of the upcoming changes to be implemented by the Gainesville Plan but those changes were not reflected in the bond issue. The State of Florida was not involved in the bond issue. Petitioner built its nursing home to Florida licensure standards and was not required by Respondent to meet any more stringent requirements than for other Florida nursing homes. Upon entering the Medicaid Program, Petitioner was warned that its property costs appeared excessive. Petitioner's property costs were the highest of all nursing homes participating in Florida's Medicaid program as of January 1, 1985. Because the Gainesville Plan placed no A limitations on property costs, Petitioner was allowed to recover all of those costs in its Medicaid per diem rate. Petitioner could not recover all of its operating and patient care costs because those costs exceeded caps that were placed in the Gainesville Plan. The medicaid per patient day amount of such total property costs was initially approved by Respondent in the sum of $37.6740, based on a low occupancy during the start up phase of the facility. The implementation of the Gainesville Plan created a significant increase in the state funds budgeted for nursing homes. It was estimated that the first year increase would be approximately $50 million. The Florida Legislature, which appropriates the funds for Medicaid and makes recommendations as to how that money is to be spent, directed Respondent to implement ceilings on property costs. On September 1, 1984, the Gainesville Plan was amended to include caps for property costs. In determining reasonable caps, Respondent through the Gainesville Plan, utilized a formula similar to that which it utilizes in capping operating and patient care caps. That formula took the median of the per diem property costs for the 100 newest nursing homes participating in Medicaid and increased it by one standard deviation. New nursing homes were given a higher property cost cap during their first 18 months of operation to allow for startup costs. As a result of Respondent using this new formula for determining reimbursement rates for property cost, the Petitioner was notified in August, 1984 that effective in September 1, 1984 its property costs reimbursement rate would be reduced to $15.91 per patient day and further reduced to $12.56 effective January 1, 1985. Respondent considered the property costs reimbursement rate caps reasonable based upon a comparison of statewide per diem rates. As of January 1, 1985, only 38 or 10 percent of nursing homes participating in Medicaid had their property costs capped. The Gainesville Plan was subsequently approved by the federal government which considers the reasonableness of cost reimbursement in approving such plans. Since property costs reimbursement rates must be set at a level which will be adequate to reimburse allowable and reasonable property costs of an economically and efficiently operated facility, property costs of existing facilities that exceeded the "cap" were not "grandfathered" in under the September 1, 1984 amendment to the Gainesville Plan because they were considered not to be reasonable. Petitioner was immediately affected by the reduction in the property costs reimbursement rates which became effective on September 1, 1984. Because of its financing arrangement and because of a large Medicaid population, Petitioner experienced a large shortfall between actual costs incurred and costs that would be reimbursed by the Medicaid Program. Petitioner's property costs were the highest of all nursing homes participating in Florida's Medicaid Program as of January 1, 1985. Nationwide, Florida ranks in the top ten percent (10 percent) in average Medicaid nursing home per diem payment. There is no requirement that a nursing home accept Medicaid's patients. On October 1, 1985, Respondent went to a fair rental value system to determine allowable Medicaid property costs. Under that system, through negotiations with representatives of the nursing home industry, $28,500 was established as a reasonable cost per bed. In 1982, Petitioner's cost per bed, including financing, was approximately $41,000. Petitioner's Medicaid per diem rate has been calculated in accordance with the method set forth in the Gainesville Plan and Petitioner has not been treated differently than any other provider in the determination of its Medicaid per diem rate. Although Petitioner had been previously allowed to recover all its property cost under the Gainesville Plan prior to amendment, there was insufficient evidence in the record to prove that Petitioner's property costs not reimbursed under the plan as amended were allowable and reasonable costs of an economically and efficiently run facility.
Recommendation Having considered the foregoing Findings of Fact, Conclusions of Law, the evidence of record and the candor and demeanor of the witnesses, it is, therefore, RECOMMENDED that the Respondent enter a Final Order denying Petitioner's request for an adjustment to its Medicaid per diem rate. Respectfully submitted and entered this 21st day of May, 1987, in Tallahassee, Leon County, Florida. WILLIAM R. CAVE Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 21st day of May, 1987. APPENDIX TO RECOMMENDED ORDER, CASE NO. 84-3405 The following constitutes my specific rulings pursuant to Section 120.59(2), Florida Statutes, on all of the Proposed Findings of Fact submitted by the parties in this case. Rulings on Proposed Findings of Fact Submitted by the Petitioner Covered in the Background. Adopted in Finding of Fact 20. Adopted in Finding of Fact 4. 4.-5. Adopted in Finding of Fact 8 but clarified. 6.-8. Adopted in Finding of Fact 12 but clarified. Adopted in Finding of Fact 12 as clarified and 14. Adopted in Finding of Fact 14. Adopted in Finding of Fact 17. Rejected as immaterial and irrelevant. Rejected as not supported by substantial competent evidence in the record and as immaterial and irrelevant. Rejected as immaterial and irrelevant. Rejected as not supported by substantial competent evidence in the record. Rejected as immaterial and irrelevant. 17.-21. Rejected as not supported by substantial competent evidence in the record. Rejected as immaterial and irrelevant. Rejected as not supported by substantial competent evidence in the record. Rulings on Proposed Findings of Fact submitted by the Respondent 1.-13. Adopted in Findings of Fact 1 through 13, respectively. 14. Adopted in Finding of Fact 21. 15. Adopted in Finding of Fact 14. 16. Adopted in Finding of Fact 15. 17. Adopted in Finding of Fact 16. 18. Adopted in Finding of Fact 17. 19. Adopted in Finding of Fact 18. 20. Adopted in Finding of Fact 19. 21. Adopted in Finding of Fact 22. 22. Adopted in Finding of Fact 23. 23. Adopted in Finding of Fact 20. 24. Adopted in Finding of Fact 24. 25. Adopted in Finding of Fact 25. COPIES FURNISHED: Grafton B. Wilson, II, Esquire Gregory L. Coler, Post Office Box 1292 Secretary Gainesville, Florida 32602 Department of HRS 1323 Winewood Boulevard Tallahassee, Florida 32399-0700 Theodore E. Mack, Esquire 1323 Winewood Boulevard Building 1, Room 40 Tallahassee, Florida 32399
