The Issue The issue in this case is whether Respondents have violated provisions of Section 627.837, Florida Statutes, through payment of alleged monetary inducements to insurance agents for the purpose of securing contracts which finance insurance premiums.
Findings Of Fact Petitioner is the Department of Insurance and Treasurer (Department). Respondents are Puritan Budget Plan, Inc., and Gibraltar Budget Plan, Inc., (Respondents). Findings contained in paragraphs 3- 23, were stipulated to by the parties. Stipulated Facts Common shares in Respondents' corporations were sold to insurance agent/shareholders for between $500.00 and $2,500.00 per share, depending on date purchased. Presently, and for the purposes of this litigation, marketing and/or administrative fees paid by Respondents to agent/shareholders range from $1.00 to $13.00 per contract produced, depending on the number of payments made, and the amount of the down payment. Each per contract marketing and/or administrative fee paid by Respondents to agent/shareholders is completely unrelated to the number of contracts produced by that agent/shareholder, and is based upon the characteristics of each contract, pursuant to the terms of the shareholder purchase agreement. Perry & Co., pursuant to a written agreement, manages the day to day activities of Respondents, including solicitation of new shareholder/agents. Alex Campos is currently President of Perry & Co. Perry & Co., Dick Perry or Alex Campos have no equity ownership, either direct or indirect, in Respondents corporations. No shareholder of Perry & Co. is also a shareholder in either Respondent, and no shareholder of the Respondents is a shareholder in Perry & Co. No officer or director of Perry & Co. is an officer or director of either Respondent, and no officer or director of either Respondent is an officer or director of Perry & Co. The individual management agreements between Perry & Co. and Respondents are terminable with proper notice by either party. Respondent Puritan Budget Plan, Inc., was originally licensed by the Department as a premium finance company in 1984, pursuant to the provisions of Chapter 627, Part XV, Florida Statutes. Puritans' principle office is located at 2635 Century Parkway, Suite 1000, Atlanta, Georgia 30345. Respondent Gibraltar Budget Plan, Inc., was originally licensed by the Department as a premium finance company in 1984, pursuant to the provisions of Chapter 627, Part XV, Florida Statutes. Gibraltar's principle office is located at 2635 Century Parkway, Suite 1000, Atlanta, Georgia 30345. Customers of Respondents are typically financing automobile insurance premiums. There is little if any variation among licensed premium finance companies in the State of Florida as to the interest rate charged to customers. In 1988, the Department inquired of Respondents' activities in relation to agent/shareholder compensation arrangements. After several meetings with representatives from Respondents, the Department closed the matter without taking any action. Also in 1988, the Department proposed the adoption of Rule 4-18.009, which in part would have explicitly made payment of processing fees or stock dividends a violation of Section 627.837, Florida Statutes, but later withdrew the proposed rule. Again in 1994, the Department proposed a rule which would have explicitly made payment of processing fees or stock dividends a violation of Section 627.837, Florida Statutes. After a hearing and adverse ruling by the hearing officer, the Department withdrew proposed Rule 4-196.030(8). Financial consideration paid to insurance agents in exchange for the production of premium finance contracts may result in the unnecessary financing of contracts, and the Department believes Section 627.837, Florida Statutes, was intended to make such conduct illegal. Financial consideration paid to insurance agents in exchange for the production of premium finance contracts may result in insurance agents adding or sliding unnecessary products to make the total cost of insurance more expensive and induce the financing of additional contracts, and the Department believes Section 627.837, Florida Statutes, was intended to make such conduct illegal. An "inducement" is presently defined as "an incentive which motivates an insurance purchaser to finance the premium payment or which motivates any person to lead or influence an insured into financing the insurance coverage being purchased; or any compensation or consideration presented to a person based upon specific business performance whether under written agreement or otherwise." Rule 4-196.030(4), Florida Administrative Code (July 27, 1995). This rule is currently effective but presently on appeal. There is no evidence that Respondents unnecessarily financed any premium finance contracts or engaged in any "sliding" of unnecessary products to induce the unnecessary financing of contracts. Section 627.837, Florida Statutes, does not prohibit the payment of corporate dividends based on stock ownership to shareholders who are also insurance agents. According to the Final Bill Analysis for H.B. 2471, in 1995 the Legislature amended Section 627.837, Florida Statutes, relating to rebates and inducements. This section was amended to clarify that this statute does not prohibit an insurance agent or agents from owning a premium finance company. The statute, as amended, is silent on the issue of how owner-agents may be compensated. Other Facts Approximately 80 percent of Respondents' insureds will turn to the shareholder/agent to handle premium mailing and collection. When a shareholder/agent provides these valuable services and labor to Respondents through the servicing of the premium finance contract with an insured, payment for those services and/or recoupment of the expenses involved with their provision is made, at least in part, in the form of the marketing and administrative fees paid by Respondents to the shareholder/agent. The marketing and administrative fee payment by Respondents to shareholder/agents is made from the net profit of the corporation and represents payment of ownership interest (dividends) to shareholder/agents in addition to payment for shareholder/agent services or expenses. Respondents generally finance "non-standard" private passenger automobile insurance. Such insurance generally covers younger drivers and drivers with infraction points against their license. The average non-standard premium is $500 per year. Thirty percent of non-standard insureds will cancel their insurance prior to the renewal date. Cancellation of policies and financing arrangements by non-standard insurers require the agent to return unearned commissions, about $30 generally. In contrast, payment of an insurance premium in cash guarantees an agent his/her entire commission, an average of $90 per non-standard policy. Consequently, the financial interest of most agents is best served by cash sale of auto insurance as opposed to financing the insurance. The average amount generated by 95 percent of all premium finance contracts executed in Florida would yield an agent/shareholder approximately six dollars per contract.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is recommended that a Final Order be entered dismissing the Administrative Complaints. DONE and ENTERED in Tallahassee, Florida, this 28th day of November, 1995. DON W. DAVIS, Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 28th day of November, 1995. APPENDIX In accordance with provisions of Section 120.59, Florida Statutes, the following rulings are made on the proposed findings of fact submitted on behalf of the parties. Petitioner's Proposed Findings 1.-11. Accepted to extent included within stipulated facts, otherwise rejected for lack of citation to the record. 12. First sentence is rejected as not substantially dispositive of the issues presented. Remainder rejected for lack of record citation if not included within stipulated facts. 13.-15. Rejected to extent not included within stipulation, no citation to record. Incorporated by reference. Rejected, no record citation, legal conclusion. 18.-19. Rejected, not materially dispositive. 20. Rejected, no record citation. 21.-23. Rejected, not materially dispositive. Rejected, record citation and relevancy. Rejected, weight of the evidence. Incorporated by reference. Respondent's Proposed Findings 1. Rejected, unnecessary to result. 2.-3. Accepted, not verbatim. 4. Rejected, unnecessary. 5.-7. Accepted, not verbatim. 8.-9. Rejected, unnecessary. 10. Accepted per stipulation. 11.-12. Rejected, unnecessary. 13. Accepted per stipulation. 14.-16. Accepted, not verbatim. Rejected, hearsay. Rejected, relevance. Rejected, unnecessary. 20.-22. Accepted per stipulation. 23. Rejected, unnecessary. 24.-57. Incorporated by reference. 58.-60. Rejected, unnecessary. 61.-62. Rejected, subordinate and not materially dispositive. 63.-67. Rejected as unnecessary to extent not included in stipulated facts. Accepted per stipulation. Rejected, unnecessary. Accepted per stipulation. 72.-76. Rejected, unnecessary. 77. Accepted per stipulation. 78.-79. Incorporated by reference. 80.-87. Accepted per stipulation. 88. Incorporated by reference. 89.-90. Accepted per stipulation. 91.-95. Rejected, subordinate. 96. Accepted. 97.-101. Rejected, unnecessary. 102. Incorporated by reference. COPIES FURNISHED: Alan Liefer, Esquire Division of Legal Services 612 Larson Building Tallahassee, FL 32399-0333 Steven M. Malono, Esquire Cobb, Cole & Bell 131 N. Gadsden St. Tallahassee, FL 32301 Bill Nelson State Treasurer and Insurance Commissioner Department of Insurance The Capitol, Plaza Level Tallahassee, FL 32399-0300 Dan Sumner Acting General Counsel Department of Insurance The Capitol, PL-11 Tallahassee, FL 32399-0300
The Issue Does Petitioner, Department of Financial Services (DFS), have authority to determine if Respondent, Alberto Luis Sotero (Mr. Sotero) and Respondent, FalconTrust Group, Inc. (FalconTrust), wrongfully took or witheld premium funds owed an insurance company while a civil action between the insurance company and Mr. Sotero and FalconTrust pends in Circuit Court presenting the same issues? Should the insurance agent license of Mr. Sotero be disciplined for alleged violations of Sections 626.561(1), 626.611(7), 626.611(10), 626.611(13), and 626.621(4), Florida Statutes (2007)?1. Should the insurance agency license of FalconTrust be disciplined for alleged violations of Section 626.561(1), 626.6215(5)(a), 626.6215(5)(d). 626.6215(5)(f), and 626.6215(5)(k), Florida Statutes?
Findings Of Fact Based on the testimony and other evidence presented at the final hearing and on the entire record of this proceeding, the following findings of fact are made: Mr. Sotero is licensed by DFS as an insurance agent in Florida and has been at all times material to this matter. He holds license number A249545. FalconTrust is licensed by DFS as an insurance agency in this state and has been at all times material to this matter. It holds license number L014424. Mr. Sotero is an officer and director of FalconTrust and held these positions at all times material to this proceeding. Mr. Sotero also controlled and directed all actions of FalconTrust described in these Findings of Fact. Zurich American Insurance Company is a commercial property and casualty insurance company. FalconTrust Commercial Risk Specialists, Inc., and Zurich-American Insurance Group entered into an "Agency-Company Agreement" (Agency Agreement) that was effective January 1, 1999. The Agency Agreement bound the following Zurich entities, referred to collectively as Zurich: Zurich Insurance Company, U.S. Branch; Zurich American Insurance Company of Illinois; American Guarantee and Liability Insurance Company; American Zurich Insurance Company; and Steadfast Insurance Company. The Agreement specified that FalconTrust was an "independent Agent and not an employee of the Company [Zurich.]". . .. The Agency Agreement also stated: All premiums collected by you [Falcontrust] are our [Zurich's] property and are held by you as trust funds. You have no interest in such premiums and shall make no deduction therefrom before paying same to us [Zurich] except for the commission if any authorized by us in writing to be deducted by you and you shall not under any circumstances make personal use of such funds either in paying expense or otherwise. If the laws or regulations of the above state listed in your address require you to handle premiums in a fiduciary capacity or as trust funds you agree that all premiums of any kind received by or paid to you shall be segregated held apart by you in a premium trust fund account opened by you with a bank insured at all times by the Federal Deposit Insurance Corporation and chargeable to you in a fiduciary capacity as trustee for our benefit and on our behalf and you shall pay such premiums as provided in this agreement. (emphasis supplied. The Agency Agreement commits Zurich to pay FalconTrust commissions "on terms to be negotiated . . . ." It requires FalconTrust to pay "any sub agent or sub producer fees or commissions required." The Agency Agreement also provides: Suspension or termination of this Agreement does not relieve you of the duty to account for and pay us all premiums for which you are responsible in accordance with Section 2 and return commissions for which you are responsible in accordance with Section 3 [the Commission section.] The Agency Agreement was for Mr. Sotero and Falcontrust to submit insurance applications for the Zurich companies to underwrite property and casualty insurance, primarily for long- haul trucking. The Agency Agreement and all the parties contemplated that Mr. Sotero and FalconTrust would deduct agreed-upon commissions from premiums and remit the remaining funds to Zurich. On September 14, 2000, Zurich and Mr. Sotero amended the Agency Agreement to change the due date for premium payments and to replace FalconTrust Group, Inc. (FalconTrust) for FalconTrust Commercial Risk Specialists, Inc., and to replace Zurich-American Insurance Group and Zurich Insurance Company, U.S. Branch, with Zurich U.S. Mr. Sotero and Zurich's authorized agent, Account Executive Sue Marcello, negotiated the terms of the commission agreement as contemplated in the Agency Agreement. Mr. Sotero confirmed the terms in a July 20, 1999, letter to Ms. Marcello. The parties agreed on a two-part commission. One part was to be paid from the premiums upon collection of the premiums. The second part, contingent upon the program continuing for five years, was to be paid by Zurich to Mr. Sotero and FalconTrust. The total commission was 20 percent. FalconTrust and Mr. Sotero were authorized to deduct 13 percent of the commission from premiums before forwarding them to Zurich. The remaining seven percent Zurich was to pay to Mr. Sotero and FalconTrust at the end of the program or after the fifth year anniversary date. The letter spelled out clearly that Zurich would hold the money constituting the seven percent and was entitled to all investment income earned on the money. The passage describing the arrangement reads as follows: Our total commission is 20 percent however Zurich will hold and retain the first 7 percent commission where they are entitle [sic] to earn investment income. I understand that FalconTrust will not benefit from this compounded investment income. However you mentioned you would increase our initial commission that is set at 13 percent currently from time to time depending on FalconTrust reaching their goals, but it will never exceed a total commission of 20 percent. It is to our understanding that the difference will be paid at the end of the program or after the fifth year anniversary date being 12/31/2005, but not earlier than five years. I do understand that if Zurich and/or FalconTrust cancels the program on or before the fourth year being 12/31/2004 that we are not entitle [sic] to our remaining commission that you will be holding. If the program is cancelled after 12/31/2004 by FalconTrust and/or Zurich it is understood that all commission being held will be considered earned. (emphasis added.) Until the program ended, the parties conducted themselves under the Agency Agreement as described in the letter. At some point the parties agreed to decrease the percentage retained by Zurich to five percent and increase the percentage initially paid to and kept by FalconTrust to 15 percent. During the course of the relationship FalconTrust produced approximately $146,000,000 in premiums for Zurich. At all times relevant to this matter, all premium payments, except for the portion deducted by sub-agents and producers before forwarding the payments to Mr. Sotero and FalconTrust were deposited into a trust account. The various sub-agents of FalconTrust collected premiums and forwarded them to FalconTrust, after deducting their commissions, which were a subpart of the FalconTrust 13 percent commission. FalconTrust in turn forwarded the remaining premium funds after deducting the portion of its 13 percent left after the sub-agent deduction. This was consistent with the Agency Agreement and accepted as proper by Zurich at all times. All parties realized that the held-back seven percent, later five percent, was money that Zurich would owe and pay if the conditions for payment were met. The parties conducted themselves in keeping with that understanding. Mr. Sotero and FalconTrust described the practice this way in their Third Amended Complaint in a court proceeding about this dispute: "In accordance with the Commission Agreement, Zurich held the contingency/holdback commission and received investment income thereon." (Emphasis supplied.) In 2006 Zurich decided to end the program. In a letter dated December 8, 2006, Tim Anders, Vice President of Zurich, notified Mr. Sotero that Zurich was terminating the Agency-Company Agreement of January 1, 1999. The letter was specific. It said Zurich was providing "notification of termination of that certain Agency-Company Agreement between Zurich American Insurance Company, Zurich American Insurance Co. of Illinois, American Guarantee and Liability Insurance Co., American Zurich Insurance Company, Steadfast Insurance Company . . . and FalconTrust Grup, Inc. . . ., dated January 1, 1999, . . .." Mr. Sotero wrote asking Zurich to reconsider or at least extend the termination date past the March 15, 2007, date provided in the letter. Zurich agreed to extend the termination date to April 30, 2007. At the time of termination FalconTrust had fulfilled all of the requirements under the Agency-Agreement for receipt of the held-back portion of the commissions. Mr. Sotero asked Zurich to pay the held-back commission amounts. He calculated the amount to exceed $7,000,000. Zurich did not pay the held- back commission amounts. As the program was winding down and the termination date approached, FalconTrust continued to receive premiums. As the Agency Agreement and negotiated commission structure provided, FalconTrust deducted its initial commission from the premium payments. But, reacting to Zurich's failure to begin paying the held back commission amounts, Mr. Sotero engaged in "self help." He deducted at least $6,000,000 from the premium payments from customers, received and deposited in the trust account. He took the money as payment from Zurich of earned and held back commissions.3 Nothing in the Agency Agreement or negotiated commission agreement authorized this action. In March of 2007, Mr. Sotero and FalconTrust also brought suit against Zurich in the Circuit Court for the Eleventh Judicial Circuit, Miami, Florida. The issues in that proceeding include whether Mr. Sotero and FalconTrust wrongfully took premiums and how much Zurich owes them for commissions. As of the final hearing, that cause (Case Number 07-6199-CA-01) remained pending before the court and set for jury trial in August 2010. There is no evidence of a final disposition. But the court has entered a partial Summary Judgment determining that FalconTrust wrongfully took premium funds for the commissions that it maintained Zurich owed. The court's Order concludes that the issue is not whether Zurich owed money to FalconTrust, but whether FalconTrust was entitled to take the funds when it did. Like the undersigned, the court determines that it was not. Between December 8, 2006, the date of the cancelation letter, and April 30, 2007, the program termination date, Mr. Sotero and FalconTrust did not remit to Zurich any of the approximately $6,000,000 in premium payments received. Despite not receiving premiums, Zurich did not cancel or refuse to issue the policies for which the premiums taken by Mr. Sotero and FalconTrust were payment. The policies remained in effect.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Financial Services suspend the license of Adalberto L. Sotero for nine months and suspend the license of FalconTrust Group, Inc. for nine months. DONE AND ENTERED this 15th day of October, 2010, in Tallahassee, Leon County, Florida. S JOHN D. C. NEWTON, II 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 15th day of October, 2010.
The Issue The issue presented is whether Respondent is guilty of the allegations contained in the Administrative Complaint filed against him, and, if so, what disciplinary action should be taken against him, if any.
Findings Of Fact At all times material hereto, Respondent has been licensed in Florida as a life and variable annuity contracts salesman and as a life and health insurance agent. In 1994 twin sisters Edith Ellis and Gertrude Franklin attended a luncheon at which Respondent made a presentation. The sisters were then 79 years old, and both were the owners of single-premium insurance policies issued by Merrill Lynch. They decided to cash in their existing policies and purchase new policies through Respondent. Both Ellis and Franklin executed 1035 exchange forms whereby the monies obtained from cashing in their Merrill Lynch policies were transferred to the insurance companies issuing their new policies. Both were charged a substantial penalty by Merrill Lynch. On August 11, 1994, Security Connecticut Insurance Company issued to Edith Ellis a flexible premium adjustable life insurance policy with a face value of $150,000. The cover page of the policy recites in bold print that it is a flexible premium adjustable life insurance policy, directs the insured to read the policy, and provides a 20-day period for canceling the policy with a full refund. It also contains a statement that provides: This Policy provides flexible premium, adjustable life insurance to the Maturity Date. Coverage will end prior to the Maturity Date if premiums paid and interest credited are insufficient to continue coverage to that date. Dividends are not payable. Flexible premiums are payable to the end of the period shown, if any, or until the Insured's death, whichever comes first. The cover page also recites that the first premium is $75,000 and that the monthly premium is $805.75. After deductions, Merrill Lynch only transferred $44,928.81, and Ellis never paid any additional premiums. Therefore, the policy was not funded to maturity since the company only received a partial payment. The insurance company did not set up this policy to receive periodic premium payments because it was originally anticipated that the company would receive $75,000 which would carry the expense, based upon the then interest rate. The policy was dependent upon interest rates. The company sent annual statements, however, to both Ellis and to the agency where Respondent worked. These statements clearly showed a declining accumulated value for the policy and specified how much it had declined from the previous year. When Ellis surrendered the policy on July 3, 2002, its value was $4,849. First Colony Life Insurance issued a flexible premium adjustable life insurance policy to Gertrude Franklin on October 18, 1994, with a face value of $600,000. The cover page provides for a 20-day cancellation period with a full refund of premiums paid. In bold type, the cover page further advises as follows: "Flexible Premium Adjustable Life Insurance Policy", "Adjustable Death Benefit Payable at Death", "Flexible Premiums Payable During Insured's Lifetime", and "Benefits Vary with Current Cost of Insurance Rates and Current Interest Rates." It also advises that the initial premium is $56,796. The insurance company received an initial premium payment of $203,993.75 on December 19, 1994, and an additional premium payment in February 1996, for a total of premiums paid of approximately $266,000. The total premiums received, however, were insufficient to fund the policy to maturity since that would have required in excess of $400,000 in premiums. Annual statements sent by the insurance company reflected that the policy value was declining. On August 26, 1996, the insurance company received a letter over the name of Nancy Franklin, the trustee of the trust which owned the policy, advising the company to send billing and annual statements to the address of the agency where Respondent was employed. Respondent sent that letter as a courtesy because Gertrude Franklin asked him to keep her papers for her because she had no place to keep them. Gertrude Franklin, not her daughter, signed that letter. Respondent left that agency in October 1997 and was not permitted to take any records with him. In 2002 Edith Ellis showed her policy to someone at a senior center. Based upon that person's statements she called her sister and told her that their policies were no good. They contacted Respondent who came to their homes and reviewed their policies. He advised Gertrude Franklin that her only options at that point were to pay an additional premium or to reduce the face value of the policy to $400,000 in order to keep it in effect longer. She chose the latter course. Respondent gave Franklin a letter for Nancy Franklin's signature directing the insurance company to reduce the face value of the policy. Franklin, not her daughter, signed the letter and forwarded it to the company. The company reduced the face value based upon that letter which it received on April 1, 2002. That directive allowed the policy to stay in force another two months.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that a final order be entered dismissing the Administrative Complaint filed against Respondent in this cause. DONE AND ENTERED this 28th day of December, 2004, in Tallahassee, Leon County, Florida. S LINDA M. RIGOT Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 28th day of December, 2004. COPIES FURNISHED: James A. Bossart, Esquire Department of Financial Services 612 Larson Building 200 East Gaines Street Tallahassee, Florida 32399-0333 Nancy Wright, Esquire 7274 Michigan Isle Road Lake Worth, Florida 33467 Honorable Tom Gallagher Chief Financial Officer Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300 Pete Dunbar, General Counsel Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300
The Issue The primary issue in this case is whether Respondent misrepresented or failed to disclose material terms and conditions pertaining to annuities that he sold to several senior citizens. If Respondent were found guilty of any disciplinable offense, then the next issue would be whether Petitioner should impose discipline for such violations as Respondent may be found to have committed.
Findings Of Fact At all times relevant to this case, Respondent Peter S. Tust ("Tust") held a valid license to transact business in Florida as a life insurance agent, which authorized him to sell products such as life and health insurance policies and fixed and variable annuities. This case arises from two separate transactions in which Tust sold an insurance product known as an equity index annuity to (a) Dora Indiviglia and (b) Abraham and Elaine Gelch. Petitioner Department of Financial Services ("DFS" or the "Department") is the state agency charged with administering the provisions of the Florida Insurance Code, among other responsibilities. The Department alleges that Tust fraudulently induced Ms. Indiviglia and the Gelchs to purchase annuities that were not suited to their respective financial needs. Because Tust is a licensed insurance agent, he falls within the Department's regulatory and disciplinary jurisdiction. Broadly speaking, an annuity is a contractual arrangement pursuant to which an insurance company, in exchange for a premium (or purchase price), agrees to pay the owner or his beneficiary a specified income for a period of time. Annuities are generally classified as "fixed" or "variable." Under a fixed annuity, the benefit is paid according to a predetermined interest rate. With a variable annuity, the premium is invested on the owner's behalf in, for example, stocks or bonds, and the amount of the benefit, when paid, reflects the performance of that investment, be it positive or negative. Fixed annuities can be either "immediate" or "deferred." An immediate fixed annuity is one under which the insurer begins paying the benefit upon purchase of the annuity. Under a deferred annuity, in contrast, the premium is allowed to grow over time, until the contract "matures" or is "annuitized" and the insurer begins paying the benefit. The equity index annuities which Tust sold to Ms. Indiviglia and the Gelchs are considered fixed deferred annuities. An equity index annuity is a contract under which the insurer agrees to pay a benefit based on a premium that earns interest at a rate determined by the performance of a designated market index such as the S&P 500. The premium is not invested in the market for the owner's account (as would be the case with a variable annuity). Rather, to explain the concept in the simplest terms, the interest rate rises (or falls) in relation to the index's performance, within predetermined limits. (None of the annuities involved in this case permitted the interest to fall below zero; that is, an owner's principal was never at risk of being lost due to the market's performance.) It is undisputed that the equity index annuities which Tust sold to Ms. Indiviglia and the Gelchs were approved for sale to senior investors by the Department. Equity index annuities are typically long-term investments. Owners of such annuities have limited access to the funds invested and accumulating in their accounts, although some equity index annuities permit yearly penalty-free withdrawals at set percentages. The accrued interest is generally not taxed until the funds are withdrawn or the benefit is paid under annuity. Besides taxes, the purchaser may incur substantial surrender penalties for canceling the contract and receiving his funds ahead of a specified date. Some equity index annuities identify a date——often many years in the future——on which the insurer will "annuitize" the contract if it has not done so already at the purchaser's request. This date is sometimes called the "maturity date." The benefit payable under the annuity is determined based on the account's value as of the maturity date, and the payments to the owner or beneficiary of the annuity begin at that time. Under the annuities in question here, the purchaser was not required to keep his or her funds invested until the maturity date. Rather, subject to certain limitations not at issue, the purchaser could elect to "annuitize" his or her contract practically at any time and thereby begin receiving the annuity payments. Therefore, in this case at least, the fact that the maturity date was beyond a purchaser's expected lifespan is not, of itself, compelling proof that the annuity was an unsuitable investment for him or her. The Indiviglia Transaction. In February 2005, Ms. Indiviglia attended one of the luncheon seminars that Tust routinely conducted in restaurants near his place of business in Boca Raton, Florida. At these seminars, Tust provided a meal and a sales presentation to his invitees. Tust made clear to those in attendance that he was selling equity index annuities and would recommend the purchase of this sort of annuity to anyone interested for whom such an investment would be suitable. Ms. Indiviglia was interested and made an appointment to meet with Tust. She was 65 years old at the time. As she told Tust when they met on February 25, 2005, Ms. Indiviglia's annual income was about $41,000, which she received from pensions and Social Security. She had recently sold some property and wanted to invest the proceeds, which amounted to about $150,000. Ms. Indiviglia had made financial investments before meeting Tust. She had invested in the stock market beginning in the late 1970s. Additionally, she had invested in a 401k account when she worked for the investment bank J.P. Morgan, had purchased mutual funds outside of the 401k, and had bought a variable annuity through another broker in 2003 or 2004. Ms. Indiviglia told Tust her goals were safety, growth, and future income. Upon meeting with Tust, Ms. Indiviglia agreed to purchase an equity index annuity from Fidelity and Guaranty Life Insurance Company ("F&G") for a premium of approximately $149,000. By purchasing this particular product, Ms. Indiviglia was eligible for, and received, a bonus of approximately $15,000, which was added to her account. If she surrendered (or canceled) this annuity during the first 14 years, however, Ms. Indiviglia would pay a penalty, starting at 18% for a cancellation during the first year and declining each year thereafter until the fourteenth year, when the surrender penalty would be 1%. The maturity (or annuity) date on Ms. Indiviglia's annuity was April 22, 2030. (Because she would be 90 years old by that time, the chances were good that Ms. Indiviglia would surrender or annuitize the contract before the maturity date.) In applying for the F&G annuity, Ms. Indiviglia executed an Annuity Application, a Confirmation Statement, and a Senior Annuity Suitability Acknowledgement. On page one of the Senior Annuity Suitability Acknowledgement, Ms. Indiviglia declined to answer certain questions related to her financial needs and objectives by placing a check mark beside the following statement: "No, I decline to answer the questions below, but I believe a Fidelity and Guaranty Life or Americom Life and Annuity annuity contract meets my needs for my financial situation." Ms. Indiviglia placed her signature and the date (3/8/2005) beneath this statement. On the second page of the Senior Suitability Acknowledgement, Ms. Indiviglia manifested her understanding of several statements, including the following, which she checked: ? This is not a short-term investment. ? Cash withdrawals from or a complete surrender of the contract are subject to certain limitations and charges as described in the contract. ? Surrender charges/fees may be incurred as a result of liquidating certain existing accounts; however, I believe this transaction to be in my best interest. Ms. Indiviglia placed her signature and the date (3/8/2005) below these statements. Tust delivered the F&G annuity contract to Ms. Indiviglia on May 16, 2005. Ms. Indiviglia executed a Delivery Receipt acknowledging that she had received not only the annuity contract, but also a contract summary. On the "Policy Information" page of the contract, which is Page 1, in boldfaced type, were the following provisions: RIGHT TO CANCEL. If you decide not to keep this policy, return it within 10 days after you receive it. It may be returned to any of our agents or it may be mailed to us.The return of this policy will void it from the beginning. Any premium paid will be refunded within 10 days of our receipt of this policy. YOU HAVE PURCHASED AN ANNUITY POLICY. CAREFULLY REVIEW THIS POLICY FOR LIMITATIONS. CANCELLATION MAY RESULT IN A SUBSTANTIAL PENALTY KNOWN AS A SURRENDER CHARGE. On Page 2 of the contract, the Annuity Date of April 22, 2030, was plainly disclosed, as was the "Surrender Factor" for each policy year from first (18%) to the fourteenth (1%). Three pages later, on Page 5, under the boldfaced heading, "SURRENDERS," appeared the following: Surrender Charge A surrender charge may be imposed on withdrawals and at death. The surrender charge equals the surrender factor for the appropriate policy year, as shown on the policy information page, multiplied by the amount of the account value withdrawn. The account value withdrawn consists of the amount paid upon a surrender request, or applied to an annuity option, and the surrender charge thereon. Waiver of Surrender Charges The surrender charge will not apply to the account value if payments are made under an annuity option. The Policy Information page clearly identified the Riders and Endorsements to the contract, one of which was entitled, "Partial Withdrawals Without Surrender Charges Rider." That Rider, which was attached to the contract, provided as follows: After the first policy anniversary, a portion of the account value withdrawn will not be subject to a surrender charge. The amount, which can be surrendered without a surrender charge, is up to 10% of the premiums paid, less any amounts previously surrendered in the current policy year which were not subject to the surrender charges. Maximum Benefit: the total maximum amount, which can be surrendered without a charge, is 25% of the premiums paid. Once the maximum amount has been surrendered without charges, any additional surrenders will incur a charge, unless additional premium is paid. Ms. Indiviglia held the F&G annuity into the third policy year. In or around July 2007, she made a penalty-free withdrawal of $12,000. Then, about a month later, she elected to surrender the contract, incurring a 16% penalty for the early withdrawal of her account balance. Although the evidence is not clear as to precisely how Ms. Indiviglia fared, financially, in this transaction, it is undisputed that, notwithstanding the surrender penalty, she actually made money on the investment——at least about $2,000 and perhaps as much as $14,000 or so. The provisions of the F&G annuity which DFS alleges Tust misrepresented or failed to disclose to Ms. Indiviglia were clearly stated, unambiguously, in the contract itself. The evidence fails to convince the undersigned to find, without hesitancy, that Tust misrepresented or failed truthfully to disclose to Ms. Indiviglia any of the F&G annuity contract's material terms and conditions, knowingly made other false representations of material fact about the product, or otherwise made any false promises in connection with the investment. Likewise, the evidence is insufficient to convince the undersigned that the F&G annuity was an inappropriate investment for Ms. Indiviglia, taking into account her stated financial needs and goals, age, wealth, and relative sophistication as an investor. To the contrary, viewing the evidence as a whole, the undersigned determines that the F&G annuity fell squarely within the range of reasonable investments for a person having Ms. Indiviglia's investment profile. The Gelch Transaction. In September 2006, Abraham Gelch, 73, and his wife Elaine, 68, attended one of Tust's luncheon seminars. Mr. Gelch was a retired accountant; to that time he had been primarily responsible for his family's financial decisions. Although Mrs. Gelch denied being knowledgeable regarding investments when she testified in this proceeding, she is well-educated, holding a bachelor's degree and a master's degree, and was sufficiently conversant at hearing regarding the subject annuities to persuade the undersigned that she was and is able to comprehend the particulars of the transaction in issue. After the seminar, the Gelchs met with Tust to discuss purchasing equity index annuities. At the time, they were living on Social Security plus the returns on their investments. The Gelchs had, in 2006, financial investments totaling nearly $2 million, most of which wealth was held in a brokerage account at Morgan Stanley. According to their U.S. income tax return, which they gave to Tust, the Gelchs' adjusted gross income for 2005 was approximately $100,000, about $35,000 of which was derived from investments, according to other information the Gelchs provided Tust. At the meeting with Tust, Mr. Gelch completed a "financial goals and needs" form on which he ranked his investment objectives in order of importance. He ranked the items from 1 to 6, with "1" being the most important, as follows: Protecting my assets from losses 1 Growing my assets 2 Generating more income 3 Leaving money to my children/heirs 6 Replacing my pension income for my spouse if I pass first 4 Protecting my assets from taxes at death 5 Mr. Gelch placed his signature and the date (09/27/06) below this enumeration of his priorities as an investor. On the same form, Mr. Gelch expressed his agreement with the statement, "It is important that my investments are 100% safe from this point forward," and he expressed disagreement with the statement, "I am willing to take some risk (and possible losses) with my investments." Mr. Gelch disclosed on the form that he and his wife had suffered investment losses of $300,000 between 2000 and 2002. In completing the statement, "My greatest financial concern is ," Mr. Gelch wrote: "OUTLIVING MY INCOME." Ultimately, Mr. and Mrs. Gelch agreed to purchase six equity index annuities, two issued by Allianz Life Insurance Company of North America ("Allianz"), and four by Midland National Life Insurance Company ("Midland"), for premiums totaling, in the aggregate, approximately $1.4 million. These annuities were similar in concept to the F&G annuity that Ms. Indiviglia had purchased, having interest rates pegged to market indices, surrender charges for early termination, limitations on penalty-free withdrawals, annuity dates some years in the future, and strong protection against loss of principal.1 With the Allianz annuities, surrender penalties declined over ten years, from 15% in the first year down to 2.14% in the tenth policy year. After one year, the Gelchs could withdraw up to 10% of the premium annually without penalty, to a maximum (over the first 10 policy years) of 50% of the premium paid. Under the Allianz annuities, the Gelchs could begin making systematic withdrawals of credits——that is, they could take distributions of interest earned on their accounts—— without penalty after the fifth policy year. The maturity dates for the Allianz annuities were in 2016. The Midland annuities, like the others, provided for surrender penalties, which declined from 18% to 2% over fourteen years. After the first year, the Gelchs could withdraw up to 10% of the "accumulation value" (premiums paid plus interest earned) of each policy annually without penalty, up to the entire value of the respective annuity. The maturity dates for the Midland annuities fell in 2048 and 2053. In connection with the applications for the Allianz annuities, Mr. and Mrs. Gelch each completed the following forms: Application for Annuity, Product Suitability Form, and Statement of Understanding. In the Product Suitability Form, the Gelchs identified a net worth of more than $1 million and confirmed prior investments in certificates of deposit, fixed annuities, variable annuities, and stocks/bonds/mutual funds. In a section entitled, "Accessing your money," the Gelchs indicated that they intended to access the funds in "10 or more years" as a lump sum. Each Allianz Statement of Understanding is a five page document that identifies the terms of the annuities, including the surrender charges and the methods of calculating interest. The Statements of Understanding do not guarantee a 6-9% return, which is what Mrs. Gelch testified Tust had promised the annuities afforded. Instead, for an indexed investment, each document states, "At the end of each contract year, the capped monthly returns are added together to calculate your indexed interest for that year. If this sum is negative, the indexed interest for that year will be zero." In connection with the applications for the Midland annuities, the Gelchs were provided Annuity Disclosure Statements, which identified the liquidity provisions and contained the following declaration: I understand that [this] annuity is a long- term contract with substantial penalties for early surrenders. A surrender charge is assessed, as listed below on any amount withdrawn, whether as a partial withdrawal or full surrender, that is in excess of the penalty-free amount applicable. The surrender charges vary by product option and decline as [shown in the table.] (Emphasis in original; table in original not reproduced here.) Mr. And Mrs. Gelch each signed and dated this declaration, manifesting their understanding of the surrender charges, which charges, as the disclosure form further explained, "allow the company to invest long-term, and in turn, generally credit higher yields." In addition, on the respective disclosure forms that the Gelchs signed, each of them specifically refused (by signing or placing initials next to the word "Decline"), a 7-year surrender charge option offering no bonus; and a 10-year surrender charge option offering a 5% bonus. Instead, Mr. And Mrs. Gelch each separately requested (by signing or placing initials next to the word "Elect"), the 14-year surrender charge option offering a 10% bonus. Mr. Gelch also completed a Deferred Annuity Suitability Form for Midland, which among other things included the following: 4. An annuity is a long-term contract with substantial penalties for early surrenders and/or distributions. In answering the following question, do not include the funds used to purchase this annuity contract, or any funds from annuities already owned. Do you have sufficient available cash, liquid assets or other sources of income for monthly living expenses and emergencies? Yes ? No (Emphasis in original; check mark handwritten on original.) Mr. Gelch affixed his signature to the suitability form, immediately below a declaration stating: I acknowledge that I have read this Deferred Annuity Suitability Form and believe this annuity meets my needs and is suitable. To the best of my knowledge and belief, the information above is true and complete. Mr. and Mrs. Gelch owned the Allianz and Midland annuities for a little more than a year before surrendering them in January of 2008. The surrender penalties for such early terminations, which charges had been fully disclosed to the Gelchs, were steep: 18% on the Midland annuities and 15% on the Allianz annuities. Despite the surrender penalties, which totaled approximately $200,000, the Gelchs' net loss on the investments (owing to their decision to surrender the annuities so soon after purchasing them) was only about $23,000, due to the investment gains and the bonuses. The provisions of the Allianz and Midland annuities which DFS alleges Tust misrepresented or failed to disclose to the Gelchs were clearly stated, unambiguously, in the written disclosures provided to the Gelchs, not to mention in the contracts themselves. The Gelchs, in turn, gave Tust (and through him the issuing insurers) numerous objective manifestations, in writing, of their understanding of these material terms and conditions. The evidence fails, ultimately, to convince the undersigned to find, without hesitancy, that Tust misrepresented or failed truthfully to disclose to the Gelchs any of the annuity contracts' material terms and conditions, knowingly made other false representations of material fact about the products, or otherwise made any false promises in connection with the Gelchs' investments. Likewise, the evidence is insufficient to convince the undersigned that the Allianz and Midland annuities were inappropriate investments for the Gelchs, taking into account their stated financial needs and goals, respective ages, health, wealth, and relative sophistication as investors. To the contrary, viewing the evidence as a whole, the undersigned determines that the annuities fell squarely within the range of reasonable investments for persons having the Gelchs' investment profile. Ultimate Factual Determinations. In view of the historical facts found above, the undersigned has determined, based the appropriate standard of proof (discussed below) as applied to the evidence adduced at hearing, that Tust is not guilty of any of the following offenses with which he was charged: (a) willfully misrepresenting the terms of any annuity contract as proscribed in Section 626.611(5), Florida Statutes; (b) demonstrating a lack of fitness or trustworthiness to engage in the business of insurance, which is punishable under Section 626.611(7), Florida Statutes; (c) engaging in fraudulent or dishonest practices, a disciplinable offense pursuant to Section 626.611(9), Florida Statutes; (d) willfully failing to comply with, or of violating, a provision of law, which is punishable under Section 626.611(13), Florida Statutes; violating any applicable provision of law, which may subject the violator to discipline under Section 626.621(2), Florida Statutes; (e) engaging in unfair methods of competition or deceptive acts, as prohibited in Section 626.9541, Florida Statutes; and (f) failing to present accurately and completely every fact essential to a client's decision, as required under Florida Administrative Code Rule 69B-215.210. Moreover, although Tust did not have the burden to prove his innocence in any respect, the greater weight of the evidence nevertheless persuades the undersigned to determine that he did, in fact, fulfill the obligations he owed to Ms. Indiviglia and the Gelchs under Section 627.4554, Florida Statutes, which governs transactions involving sales of annuities to senior consumers.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Financial Services enter a Final Order finding Peter S. Tust not guilty of the charges that were brought against him in this proceeding. DONE AND ENTERED this 3rd day of November, 2009, in Tallahassee, Leon County, Florida. JOHN G. VAN LANINGHAM 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 3rd day of November, 2009.
Findings Of Fact Based upon my observation of the witnesses and their demeanor while testifying, the documentary evidence received and the entire record compiled herein, the following relevant facts are found. Respondent, John Roger Pascale, currently holds an insurance license issued by the Florida Department of Insurance (Petitioner), and is eligible for the issuance of further licenses. It is admitted that Respondent was a licensed general lines agent during times material to the Complaint allegations herein. Respondent, however, has voluntarily elected not to renew his license since September, 1980. By its five count Administrative Complaint dated June 13, 1980, Petitioner advised Respondent that it intended to revoke, refuse to issue or renew, or to impose lesser penalties as may be proper under the provisions of Sections 626.611 and 626.621, Florida Statutes. The main thrust of Count I is that Respondent committed the following violations: Received premiums or other funds belonging to insurers or others in transactions under his license which were trust funds received by him in a fiduciary capacity, which funds he failed to account for or pay to the insurer, insured or other persons entitled thereto in violation of Chapter 626.561(1), Florida Statutes. Lacked one or more of the qualifications for the license or permit as specified in the Insurance code in violation of Chapter 626.611(1), Florida Statutes. Willfully, under his license, circumvented the prohibitions of the insurance code. Chapter 626.611(4), Florida Statutes. Was willfully deceptive with regard to an insurance policy in violation of Section 626.611(5), Florida Statutes. Demonstrated a lack of fitness or trustworthiness to engage in the business of insurance contrary to the requirements contained in Chapter 626.611(7), Florida Statutes. Demonstrated a lack of reasonable and adequate knowledge and technical competence to engage in the transactions authorized by the license or permit. Chapter 626.611(8), Florida Statutes. Engaged in fraudulent or dishonest practices in violation of Chapter 626.611(9), Florida Statutes. Misappropriated, converted, or unlawfully withheld monies belonging to insurers, insureds, beneficiaries, or others and received in the conduct of business under his license. Chapter 626.611(10), Florida Statutes. Willfully violated an order, rule or regulation of the insurance department, or willfully violated a provision or provisions of the insurance code. Chapter 626.611(13), Florida Statutes. Withheld information from which the issuance of a license or permit could have been refused had it then existed and been known to the department contrary to the requirements of Chapter 626.621(1), Florida Statutes. Violated a provision of the insurance code contrary to Chapter 626.621(2), Florida Statutes. Violated a lawful order, rule, or regulation of the department in violation of Chapter 626.621(3), Florida Statutes. Has shown himself to be a source of injury or loss to the public or detrimental to the public interest in violation of Chapter 626.621(6), Florida Statutes. In support of the above allegations, Petitioner produced as its primary witness, Delores V. Cardet, who first purchased insurance from Respondent in November of 1977. The agent employed by Respondent with whom Ms. Cardet transacted business was Rigo Avila (Avila). (See Petitioner's Exhibit 1) Ms. Cardet's insurance application was transmitted to Lumberman's Insurance Company to effect the appropriate coverage. Her complaint against Respondent is that the wrong address was placed on her insurance application and that she was overcharged for insurance based on the premiums quoted by agent Avila. Respecting the allegation that agent Avila placed the wrong address on her insurance application, evidence indicates that when this matter was called to Respondent's attention, the matter was taken care of and Ms. Cardet subsequently received billing notices at the correct address. (Petitioner's Exhibit 3). During the time in which Ms. Cardet purchased insurance through Respondent's agency, she was employed as a manager for Beneficial Finance Company of Florida. As part of her employment duties, Ms. Cardet is involved in collections and has received management training from her employer. During the period in question Ms. Cardet had one address change. This change was properly brought to Respondent's attention and the change was effected without incident. Respondent quoted Ms. Cardet a total premium during 1978 of $699.00 whereas the insurer, Lumberman's Insurance Company, charged Ms. Cardet an annual premium of $677.00. The $22.00 overcharge represented the difference between the premium quoted by agent Avila and the actual premium charged. The excess was referred to the premium finance company (Sonny Financial Services) where it was handled as a credit toward the balance owed by Ms. Cardet. During 1979, Ms. Cardet was quoted a total annual premium of $797.00 for renewal of her insurance policy. Her policy reflects a premium of $662.00 plus two (2) motor club memberships for her two (2) vehicles at the rate of $50.00 each. The remaining difference of $35.00 was refunded from Kemper Insurance Company and forwarded to Sonny Financial Services as a credit toward the remaining balance of Ms. Cardet's premiums. 2/ Linda Manning, the underwriting service manager for Lumberman's Mutual Casualty Company, a subsidiary of the Kemper Insurance Group, acknowledged that in the insurance business, mistakes regarding insurance print-outs occur on a frequent basis. Ms. Manning services several hundred premium changes daily and testified that there are numerous reasons for an agency to give a prospective insured an improper quote. Among the reasons listed by Ms. Manning is the fact that drivers' records are not always available for a prospective insured and rate adjustments occur for various reasons. COUNT TWO The gravamen of Count Two is that Respondent's employees used an incorrect address when insurance was placed by Respondent's agency for Mr. Jeffrey Brown which resulted in the insured not getting a premium notice from the insurance company. It is also alleged that Respondent willfully listed an incorrect address for Mr. Brown in a lower rate territory which gave the insured the advantage of a lower premium. In support of the above allegations in Count Two, Petitioner introduced the testimony of Respondent's former spouse, Robin LaPlante. Ms. LaPlante's husband, Jeffrey Brown, purchased insurance through Respondent's agency on February 26, 1978. It is alleged that Respondent falsely indicated on the Brown application for automobile liability coverage with Lumberman's Mutual Casualty Company that Mr. Brown's address was in Lauderhill, Florida, whereas he actually resided in Miami, Florida. Ms. LaPlante's complaint with Respondent is that they sold a van, which was one of the two vehicles covered under the policy, and it took approximately nine (9) months before the van was deleted and a refund check was issued for termination of that coverage. Ms. LaPlante had no direct dealings with Respondent and/or his agents during the time in question. Respondent's dealings were with Ms. LaPlante's former husband, Jeffrey Brown, who did not appear to testify in these proceedings. COUNT THREE As amended by Order dated December 31, 1980, Count Three alleges that Respondent employed the services of someone other than his employees or himself to complete a portion of an insurance application; that the insured was sold membership in a motor club without his knowledge and consent and that the Respondent unlawfully endorsed a check payable to the insured from the insurance carrier to reinstate the insured's policy which had been cancelled by the insurance carrier. In support of Count Three, Petitioner presented the testimony of Stanley Friehofer. Friehofer went to Houston Motors in Dade County, Florida, for the purpose of purchasing a Subaru Brat. To do so, it was necessary for Friehofer to provide evidence of insurance on the vehicle in order to obtain financing through the dealership. Sam Houston, the salesman involved, arranged the financing on behalf of the automobile dealership. Friehofer had obtained an insurance quote from his stepmother who was also in the insurance business. After discussing the possibility of the stepmother's agency issuing a policy, Mr. Houston called Respondent, John Pascale, who was at the dealership on other matters, Respondent quoted a rate less than that quoted by Friehofer's stepmother. Friehofer paid Houston Motors $440.00 and was given an insurance binder by Sam Houston. (Petitioner's Exhibit 20). Friehofer was accompanied by his brother at Houston Motors. Also present at the time was Sam Houston. Friehofer testified that Sam Houston completed the entire insurance application and issued him the insurance binder 3/ Friehofer never received a policy for his insurance although he received a bill from Kemper Insurance Company of Orlando, Florida. (Petitioner's Exhibit 22). Friehofer noted three errors on his insurance application. Those errors were (1) his marital status (Friehofer is single), (2) the use of the vehicle was incorrectly noted, and (3) the premium quoted was the wrong amount. Friehofer also complained that he was incorrectly enrolled for membership in a motor club contrary to his consent. When Friehofer purchased the vehicle from Houston Motors, he was in the process of transferring from the Virgin Islands. Friehofer therefore used his brother's address on his insurance application. According to Friehofer, his first acquaintance with Respondent was during the taking of a deposition in this matter. Linda Manning confirmed the fact that Lumberman's Mutual charged Richard Friehofer a premium of $410.00 for insurance coverage to his vehicle. Friehofer received a cancellation notice dated April 30, 1979, from Kemper Insurance Company (Kemper) and was instructed by a Mr. Bell of Kemper to obtain "dual coverage" until Kemper could investigate the matter and refund the premiums expended by him to maintain dual coverage when the situation was resolved. Friehofer received an agency check from Respondent dated June 28, 1979. (Petitioner's Exhibit 23). Friehofer initiated the call to Kemper to advise that he intended to cancel his insurance which was effected by Respondent's agency. After Friehofer advised Kemper that he planned to cancel his coverage, he notified Respondent approximately four (4) days later. Respondent received a refund from Kemper and was unable to contact Friehofer. Respondent therefore endorsed the check and returned it to Kemper to reinstate the coverage. Respondent later learned of Friehofer's intention to, in fact, cancel the coverage and Respondent stopped payment on the check to Kemper. (See Respondent's Exhibit 1). Thereafter, Respondent refunded the premium paid from Kemper to Friehofer on June 28, 1979. (Respondent's Exhibit 13). COUNT FIVE 4/ Count Five charges Respondent with the sale of membership in a motor club to an insured and accuses the Respondent of misappropriating $38.00 of the insured's money. In support of this allegation, Petitioner introduced the deposition of Betty Monette. The thrust of this allegation is that Ms. Monette was quoted a renewal premium for her Personal Injury Protection (PIP) insurance coverage of $142.00. Thereafter, Respondent's employees determined that they could provide the same coverage through another carrier for $104.00. As a consequence, Respondent refunded the difference of $38.00 to Ms. Monette, however, the refund was accompanied by a transmittal which erroneously stated that the refund resulted from a cancellation of a motor club membership. Ms. Monette acknowledged having received the $38.00 refund, and the difference i.e. $104.00, coincides with the premium charged by Banker's Insurance for the PIP coverage. RESPONDENT'S DEFENSE Sam Houston is an official affiliated with Houston Motors. Houston contacted Respondent, who happened to be at the dealership attending to an unrelated business matter at the time the Friehofers were at the dealership to purchase a Subaru vehicle. Houston has not participated or otherwise benefited from insurance commissions derived by Respondent. Houston Motors has a policy of not being affiliated with insurance salesmen or other brokers based on legal requirements imposed upon the automobile dealerships. Houston was in charge of handling financing and insurance arrangements for purchasers of vehicles at the dealership when Stanley Friehofer purchased his vehicle from Houston Motors. Houston recalled copying basic pertinent data from a financing application onto an insurance application due to the rush that Respondent found himself in after he had quoted Friehofer a premium for coverage. Houston is not licensed to sell automobile or property insurance and is unfamiliar with the procedure of quoting premiums. When shown a copy of the insurance application executed on behalf of Friehofer, Houston recalled completing the name, address, company, telephone number, state, car information and lienholder on the insurance application. Houston was certain that he did not complete any item listed on page 2 of Petitioner's Exhibit 21 which was received in evidence herein. Houston is only licensed to sell credit life, accident and health insurance in connection with financing agreements. Houston finally recalled giving Friehofer a receipt for the $440.00 tendered for insurance premiums. Houston remembered that the Friehofer transaction was unique and to the best of his recollection, had not been previously handled by him in that fashion. Respondent, John R. Pascale, is, as stated herein, a licensed casualty, property agent who holds what is designated as a "220" license. Respondent received a bachelors degree in Business Administration from Pace University and has been involved in the insurance business since he was approximately nineteen (19) years old. Respondent started his first insurance agency in Florida during 1971, and the agency grew to five (5) offices employing approximately sixteen (16) to twenty (20) employees, presently. In response to the specific charges, Respondent had no personal dealing with Ms. Cardet on her purchase of insurance from the Pascale agency. The agent involved was Rigo Avila who was dismissed from Respondents employ on August 6, 1980. Respondent's agency files reflect that Ms. Cardet had several address changes during the three-year period in which she was insured with the assistance of Respondent's agency. Respondent countered the allegations that he incorrectly listed the wrong address for Ms. Cardet by assigning her to an area which charges lower premiums by asserting that there was no economic advantage to do this since the agency collects a commission on the amount of premiums charged. Thus, a lower premium nets the agency a lower commission. Therefore, during 1977, when Ms. Cardet was quoted a premium of $699.00, Kemper Insurance determined that the premium was approximately $677.00. A refund check was sent to Respondent which was forwarded to Segral Premium Finance Company for credit to Ms. Cardet's premium finance balance. Likewise, during 1978, Ms. Cardet was quoted a premium of $797.00 with a down payment of $300.00, with the balance financed over three (3) installments through a premium finance agency. Respondent was paid directly by the agency and the overcharge (alleged) represented a $100.00 motor club membership and a $35.00 refund which was remitted by the carrier. The refund was transferred to the premium finance agency for credit to Ms. Cardet's premium balance account. Sonny Financial Service received the $35.00 check in question. (See Respondent's Exhibits 2 and 3) Respondent acknowledged that it is an agency responsibility to correct an error once the agent learns of the error or through diligence, it is otherwise brought to the agent's attention. To correct errors, Respondent's agency usually amends the policy by means of a "declaration." Finally, Respondent acknowledged that the bookkeeping errors relative to the Cardet account had been the subject of a civil claim which was amicably settled in Ms. Cardet's behalf. (See Respondent's Exhibit 5 and 6) The insurance rates of residents in Lauderhill are generally less than the rates charged residents in Dade County. The producing agency has no control over a carrier's billing procedures. Respecting the allegations surrounding the Jeffrey Brown/Robin LaPlante matter, evidence reveals that Respondent sent policy changes per Jeffrey Brown's request to the carrier during April and September of 1978. (See Respondent's Exhibits 5 and 6) As to the allegations surrounding the Betty Monette incident, evidence revealed that Respondent was able to obtain the identical coverage through another carrier for Ms. Monette at a lower rate and thus was refunded $38.00 of a quoted $142.00 premium. The transmittal letter which accompanied the refund check, however, incorrectly stated that the $38.00 refund represented a credit for cancellation of a motor club membership. (Respondent's Exhibit 10) When all of these charges surfaced, Respondent attempted to get an understanding from his employee, Mr. Avila, who abandoned his employment with Respondent. However, Respondent did all that he could to effectively resolve the difficulties and terminated Avila's employment relationship by sending him a mailgram on August 6, 1980. (See Respondent's Exhibits 11 and 12) As to the allegations surrounding the Friehofer incident, Respondent was at Houston Motors in an effort to canvass and otherwise "drum up' additional business through the dealership. Respondent met Mr. Friehofer, quoted the insurance premium, explained the various coverages available, asked if there were questions and solicited Mr. Houston to complete the necessary basic data. Respondent acknowledged that it was not a good business practice for him to leave the insurance forms with Mr. Houston to complete, however, he considered the situation rare and unusual. He also felt that it was both an accommodation for Messrs. Houston and Friehofer. Respondent admitted that he benefited from the transaction by receiving the commission from the Friehofer insurance contract. Respondent completed the second sheet of the insurance application with the exception of the signature. (See Petitioner's Exhibit 21) Respondent did not leave any blank forms at the Houston agency or any other business enterprise. Respondent has not shared commissions received with any unlicensed or unemployed person who is not authorized to complete insurance forms. Respondent received the refund check from the Friehofer insurance application on June 20, 1979. He reviewed his file, and noted that there was no file notation regarding any intent by Mr. Friehofer to cancel his insurance coverage. He made an effort to contact Mr. Friehofer and learned that he was living with his brother-in-law in Miramar, Florida, and commuted on weekends to the Virgin Islands. He, therefore, redeposited the refund check to Kemper thinking that the policy had been erroneously cancelled. (See Petitioner's Exhibit 25 and Respondent's Exhibit 13)
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is, hereby, RECOMMENDED: That the Respondent be issued a letter of written reprimand cautioning him against the practice of allowing unlicensed or unauthorized persons to assist in completing forms which may be used to effect insurance coverage. In all other respects, it is RECOMMENDED that the complaint allegations filed herein be DISMISSED. RECOMMENDED this 25th day of March, 1981, in Tallahassee, Florida. JAMES E. BRADWELL 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 25th day of March, 1981.
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 At issue in this proceeding is whether proposed Florida Administrative Code Rule 69O-186.003(1)(c) constitutes an invalid exercise of delegated legislative authority.
Findings Of Fact Parties ATIF was established in 1948 by Florida lawyers in order to provide title insurance services to their clients. ATIF has over 6,000 member agents, all of whom are members of the Florida Bar issuing title insurance in private practice. ATIF issues policies exclusively through its member agents. Stewart Title is a title insurer operating in all 50 states. Stewart Title issues title insurance policies in Florida directly, through affiliated companies, and through independent agents. First American is a title insurer operating throughout the United States. It offers the JLP in states other than Florida, and sells the product directly, through independent agents, and through affiliated agents. As of 2007, approximately 27% of First American's business was written directly. The Financial Services Commission (the "Commission") serves as the agency head of OIR for purposes that include rulemaking. The Commission comprises the Governor, Attorney General, Chief Financial Officer, and Commissioner of Agriculture. § 20.121(3) and (3)(c), Fla. Stat. OIR is a structural unit of the Commission responsible for all activities concerning insurers and other risk bearing entities, including but not limited to licensing, rates and policy forms. The head of OIR is the Director, also known as the Commissioner of Insurance Regulation. § 20.121(3)(a)1, Fla. Stat. The JLP Title insurance is purchased to insure the purchaser (or his lender) against disputes regarding the ownership of a given piece of real property. Title insurance guarantees the transferability of the title to real property. The JLP is title insurance intended to cover "junior" mortgages, which include second mortgages and home equity loans. The JLP is intended to be less comprehensive and less expensive than a traditional owner's or lender's primary title insurance policy. The JLP ensures that the borrower is the last grantee of record for the property being used as collateral for the loan. It ensures that the tax payments are current, insures against any liens on the property, and ensures that the legal description on the policy is the same legal description found on the last deed of record.2 The JLP is not authorized for sale in the state of Florida because OIR has yet to approve a premium rate for this type of title insurance. As more fully explained below, ATIF and First American filed petitions in 2003 seeking OIR's approval of the forms and rates necessary for the issuance of the JLP, pursuant to Section 627.782, Florida Statutes. The Statute and Proposed Rule Title insurance contracts generally are governed by Chapter 627, Part XIII, Florida Statutes. Section 627.7711, Florida Statutes, provides the following definitions: As used in this part, the term: (1)(a) "Closing services" means services performed by a licensed title insurer, title insurance agent or agency, or attorney agent in the agent's or agency's capacity as such, including, but not limited to, preparing documents necessary to close the transaction, conducting the closing, or handling the disbursing of funds related to the closing in a real estate closing transaction in which a title insurance commitment or policy is to be issued. (b) "Primary title services" means determining insurability in accordance with sound underwriting practices based upon evaluation of a reasonable title search or a search of the records of a Uniform Commercial Code filing office and such other information as may be necessary, determination and clearance of underwriting objections and requirements to eliminate risk, preparation and issuance of a title insurance commitment setting forth the requirements to insure, and preparation and issuance of the policy. Such services do not include closing services or title searches, for which a separate charge or separate charges may be made. "Premium" means the charge, as specified by rule of the commission, that is made by a title insurer for a title insurance policy, including the charge for performance of primary title services by a title insurer or title insurance agent or agency, and incurring the risks incident to such policy, under the several classifications of title insurance contracts and forms, and upon which charge a premium tax is paid under s. 624.509. As used in this part or in any other law, with respect to title insurance, the word "premium" does not include a commission. "Title insurer" means any domestic company organized and authorized to do business under the provisions of chapter 624, for the purpose of issuing title insurance, or any insurer organized under the laws of another state, the District of Columbia, or a foreign country and holding a certificate of authority to transact business in this state, for the purpose of issuing title insurance. "Title search" means the compiling of title information from official or public records.[3] Section 627.782, Florida Statutes, titled "Adoption of Rates," provides as follows: Subject to the rating provisions of this code, the commission must adopt a rule specifying the premium to be charged in this state by title insurers for the respective types of title insurance contracts and, for policies issued through agents or agencies, the percentage of such premium required to be retained by the title insurer which shall not be less than 30 percent. However, in a transaction subject to the Real Estate Settlement Procedures Act of 1974, 12 U.S.C. ss. 2601 et seq., as amended, no portion of the premium attributable to providing a primary title service shall be paid to or retained by any person who does not actually perform or is not liable for the performance of such service. In adopting premium rates, the commission must give due consideration to the following: The title insurers' loss experience and prospective loss experience under closing protection letters and policy liabilities. A reasonable margin for underwriting profit and contingencies, including contingent liability under s. 627.7865, sufficient to allow title insurers, agents, and agencies to earn a rate of return on their capital that will attract and retain adequate capital investment in the title insurance business and maintain an efficient title insurance delivery system. Past expenses and prospective expenses for administration and handling of risks. Liability for defalcation. Other relevant factors. Rates may be grouped by classification or schedule and may differ as to class of risk assumed. Rates may not be excessive, inadequate, or unfairly discriminatory. The premium applies to each $100 of insurance issued to an insured. The premium rates apply throughout this state. The commission shall, in accordance with the standards provided in subsection (2), review the premium as needed, but not less frequently than once every 3 years, and shall, based upon the review required by this subsection, revise the premium if the results of the review so warrant. The commission may, by rule, require licensees under this part to annually submit statistical information, including loss and expense data, as the department determines to be necessary to analyze premium rates, retention rates, and the condition of the title insurance industry. Section 627.783, Florida Statutes, titled "Rate deviation," provides as follows: A title insurer may petition the office for an order authorizing a specific deviation from the adopted premium. The petition shall be in writing and sworn to and shall set forth allegations of fact upon which the petitioner will rely, including the petitioner's reasons for requesting the deviation. Any authorized title insurer, agent, or agency may join in the petition for like authority to deviate or may file a separate petition praying for like authority or opposing the deviation. The office shall rule on all such petitions simultaneously. If, in the judgment of the office, the requested deviation is not justified, the office may enter an order denying the petition. An order granting a petition constitutes an amendment to the adopted premium as to the petitioners named in the order, and is subject to s. 627.782. Section 627.7843, Florida Statutes, titled "Ownership and encumbrance reports," provides as follows: As used in this section, the term "ownership and encumbrance report" means a report that discloses certain defined documents imparting constructive notice and appearing in the official records relating to specified real property. An ownership and encumbrance report may not directly or indirectly set forth or imply any opinion, warranty, guarantee, insurance, or other similar assurance as to the status of title to real property. Any ownership and encumbrance report or similar report that is relied on or intended to be relied on by a consumer must be on forms approved by the office, and must provide for a maximum liability for incorrect information of not more than $1,000. On April 11, 2003, First American filed with OIR a petition for approval of title insurance policy forms, including schedules and endorsements thereto, previously approved by ALTA, for the issuance of the JLP in Florida, subject to a rate determination pursuant to Section 676.782, Florida Statutes. The petition asserted that First American had established historical data reflecting an "almost negligible default rate" for such policies, and that the growing market for "no-cost" or "low-cost" home equity loans and junior loans had led many institutional lenders to seek a product such as the JLP that could be provided quickly, accurately, and at a reasonable cost to the lender or borrower. First American did not suggest a specific premium rate for its proposed JLP.4 On or about April 14, 2003, ATIF filed with OIR a "petition for rulemaking setting title insurance rates." ATIF's petition sought approval of forms previously adopted by ALTA. Unlike the First American petition, the ATIF petition requested a specific premium rate, in the following terms: Based on the high-demand and low anticipated claims rates for this type of coverage, Petitioner estimates that a rate equal to 30% of the rate premiums presently promulgated for a mortgage title insurance policy pursuant to Rule 4-186.003, F.A.C.[5] with a minimum premium of $100.00 per policy, will provide a reasonable margin for underwriting profit and contingencies, including contingent liability as provided in [Section 627.7865, Florida Statutes],[6] such as to allow a rate of return on capital that will attract and retain adequate capital investments in the title insurance business and maintain an efficient title insurance delivery system. In support of such rate, Petitioner would show as follows: The Petitioner's low prospective loss experience under the proposed policy. The Petitioner's low expenses and low prospective expenses for administration and handling of risks. The proposed premium will be $1.725 per $1,000 of coverage up to and including $100,000, and $1.50 per $1,000 of coverage in excess of $100,000, up to and including $250,000 of maximum coverage, with a minimum premium of $100.00. This proposed rate will not be excessive, inadequate or unfairly discriminatory, and will apply throughout the State of Florida. This proposed rate will be subject to the Respondent's review not less frequently than once every three (3) years, and may be revised based on such review. By letter dated June 13, 2003, OIR informed ATIF that it agreed the rulemaking process should be initiated in this matter, and that OIR would hold workshops to gather information as to the propriety of the rate suggested by ATIF. OIR's letter notified ATIF that OIR neither approved nor disapproved of the forms submitted by ATIF at that time, pending receipt of sufficient data at the workshops to permit OIR to make an informed decision. By letter dated June 23, 2003, ATIF's senior underwriting counsel, Ted Conner, informed OIR that ATIF did not dispute OIR's decision to initiate the rulemaking process and postpone approval of ATIF's forms. Following receipt of the First American and ATIF petitions and the decision to initiate the rulemaking process, OIR commissioned The David Cox Company to prepare an actuarial report (the "Cox Report") on the rates and forms for the proposed JLP. OIR general counsel Steven Parton recalled that Mr. Cox was hired to provide "an independent look" at the two proposed rates. Mr. Cox requested information from ATIF and First American. ATIF responded with detailed answers to Mr. Cox' questions as well as to follow-up questions from OIR concerning the scope of services required to make the determination of insurability under the JLP and the events that might trigger a claim under such a policy.7 The Cox Report, dated September 2003, and provided to OIR on November 24, 2003, made the following relevant recommendations: the ALTA Residential Limited Coverage Junior Loan Policy form, the Short Form Limited Coverage Junior Loan Policy and endorsements JR1 and JR2, all dated 10/19/96, should be adopted; eligibility for the JLP should be restricted to institutional lenders, to land having 1-4 residential units, and to loan amounts less than or equal to $250,000; and that the JLP premium should be no lower than $2.00 per $1,000 of liability and no higher than $2.60 per $1,000 of liability. The premium for a standard title insurance policy is $5.75 per thousand of liability. Fla. Admin. Code R. 69O-186.003(1)(a). Mr. Cox justified his premium recommendation in summary as follows: My recommended Junior Loan Policy risk rate of $2.00 to $2.60 is a 55% to 65% discount off of the owner's policy risk rate. The discount is based on judgment considering the relatively low level of expense and loss for the Junior Loan Policy, other Florida risk rate discounts and rates used in other states. The proposed rates should not result in inadequate compensation to insurers operating through independent agents. The Cox Report was conceptually based on a comparison of the JLP to a standard title insurance policy. Mr. Cox ultimately made an actuarial judgment as to the proper discount based on the reduced coverage, the fact that eligibility would be restricted to low cost, low risk title transactions, and the reduced expenses associated with the JLP. Mr. Cox concluded his report as follows: The Junior Loan Policy is a new product in Florida and out-of-state experience is incomplete and in some respects is not comparable. By necessity judgment must be used to set the Junior Loan Policy risk rate. This section will examine the consequences of setting an initial risk rate that is either too high or too low. The title insurance industry tends to view lenders as customers and not land owners [as customers]. This is because lenders are constant business associates while owners come and go. State and Federal laws prohibit rebating to lenders and other middlemen. Rebating drives up the cost of title insurance for the land owner. Rates for the junior loan policy that are set too low would act as a rebate to the lenders who pay the Junior Loan Policy premium directly. Furthermore, title insurers do not intend to track the expenses of the junior loan policy versus the owner's policy and any subsidy of the junior loan policy rates by the owner's policy rates will never be detected and corrected. Florida case law has upheld the rebating of commissions by title insurance agents (the agent's 70% share of the risk premium).[8] The rebating of related title services is not permitted under [Florida Administrative Code Rule 4-186.003(13)(a)][9] in that related title services cannot be provided below actual cost. Assuming there is competition in the junior loan title insurance segment, there would be little error in having a somewhat high risk rate because rebating commissions would adjust the risk rate downward.[10] This assumption does not, however, apply to policies written directly buy [sic] an insurer, in which case there is no commission to rebate. There are currently no insurers operating primarily on a direct basis in Florida . . . The primary consumer for the Junior Loan Policy is the lender. The second mortgage lender is concerned with low closing costs and usually pays the title insurance premium directly. Lenders have much more bargaining power than borrowers as regards title insurance premiums. Price competition for the Junior Loan Policy is expected to be strong and lenders should be able to obtain rebates on commissions and discounts on related title services. A critical part of title insurance risk rate is that part retained by insurers operating through independent agents. This segment's only source of revenue is the 30% retained risk rate. Agents, attorneys, insurers operating through owned agencies, insurers writing directly and insurers providing related title services can supplement their revenues with related title service fees, which are essentially unregulated. Two prominent Florida title insurers, United General Title Insurance Company and Alliance Title of America, Inc. rely predominantly on the insurer's portion of the risk premium. These companies could sustain a net operating loss on Junior Loan Policy business if the risk rate is set too low. There is a range of reasonable risk rates for the Junior Loan Policy. A rate set on the high end of this range would avoid hurting insurers operating through independent agents while not necessarily hurting others. Setting a flat risk rate rather than a series of risk rates that decrease with the amount of liability further provides support for insurers operating through independent agents. Subsequent to the issuance of the Cox Report, First American commissioned Milliman USA to prepare an actuarial report (the "Milliman Report") regarding rates and forms for the JLP. The Milliman Report, written by actuary Paul Struzzieri, was dated February 2004. The Milliman Report concurred with the Cox Report as to the ALTA forms that should be adopted, and that eligibility for the JLP should be restricted to land having 1-4 residential units. As to rates, the Milliman Report recommended that the JLP premium should be no lower than $0.86 per $1000 of liability, and no higher than $1.33 per $1000 of liability, and recommended a cap of $500,000 on the junior mortgage loan. In his report, Mr. Struzzieri took a different conceptual approach from that taken by Mr. Cox, who compared the JLP to a standard title insurance policy to arrive at a judgment of how much the standard policy's rate should be discounted to arrive at a fair JLP rate. Mr. Struzzieri believed that a more valid JLP rate could be derived from viewing the rates charged for JLPs in other states, and by comparison to the rates charged in Florida for the Ownership and Encumbrance ("O&E") reports described in Section 627.7843, Florida Statutes, which is set forth in full at Finding of Fact 9, supra. Mr. Struzzieri explained his proposed rates as follows: The rationale for my proposed rates is two- fold. The Junior Loan Policy has less risk than the Original Title Insurance Policy. The reduced risk comes from reduced levels of coverage and the elimination of defalcation claims. . . . Because there is less coverage, there is significantly less work involved in preparing and issuing a Junior Loan Policy. The following sections describe the support for the Junior Loan Policy losses (associated with reduced risk) and expenses (associated with reduced work load). I believe that these reduced amounts are reflective of the costs underlying a Junior Loan Policy by comparison to (a) rates for Junior Loan Policies in other states and rates for the Ownership and Encumbrance (O&E) report, to which the Junior Loan Policy coverage is most compatible. Reduced Risk As shown in the Cox report, losses are approximately 4% to 7% of the rate in Florida. . . . The current rate for an Original Title Insurance Policy (Owner or Lender) is $5.75 per $1,000 of liability. At a 5% loss ratio, losses would equal approximately $0.30 per $1,000 of liability. In First American's August 15, 2003, response to Cox's request for information regarding the Junior Loan Policy, a loss rate of $0.03 per $1,000 of liability is assumed. I believe that this is a reasonable estimate of the loss potential for the Junior Loan Policy, based on my attached analysis. . . .[11] This represents a 90% decrease in the losses underlying the Original Title Insurance Policy rates. The proposed Junior Loan Policy rates are 74% to 85% lower than the $5.75 rate, lower percentages than that indicated by the loss experience (i.e., 90%).[12] I believe that this comparison is illustrative of the magnitude of the reduced coverage and, therefore, the reduced effort and expense involved in issuing a Junior Loan Policy. Reduced Work In Florida, "primary title services" are included in the rate and are defined to include: determination of insurability in accordance with sound underwriting practices based upon evaluation of a reasonable search and examination of the title, determination and clearance of underwriting objections and requirements to eliminate risk, preparation and issuance of a title insurance commitment setting forth the requirements to insure, and preparation and issuance of the policy. The amount of work involved in issuing a Junior Loan Policy is greatly reduced because of the reduced coverage. In addition, the risk is reduced because of certain services that are generally performed by the lender. As an example of reduced work, a Junior Loan Policy insures against losses related to the borrower not being the same as the grantee in the last recorded deed. In order to determine insurability for a Junior Loan Policy, one must review the search to verify that the borrower is the grantee in the last deed of record. In addition, one must determine that the land described in the policy is the same as the land described in the deed to the borrower. To clear underwriting objections and eliminate risk, one must review the search results from the public records to verify that there are no liens against that borrower and that real estate taxes are current. As an example of reduced risk, I point out that the home equity lender generally performs the closing and disbursement functions. Therefore, most of the costs associated with these functions are borne by the lender and not the Junior Loan Policy issuer. Since neither the agent nor underwriter is involved in disbursing the funds, the defalcation element of the premium is eliminated. Mr. Struzzieri believed that the O&E report is the product most comparable to the JLP and therefore the one most likely to yield a reasonable rate: While the above discussion illustrates the minimal level of work involved in issuing a Junior Loan Policy, it is difficult to quantify the cost of this work because solid expense data is not available. Therefore, it is appropriate to compare the Junior Loan Policy to an O&E report. Essentially, the level of work involved in issuing a Junior Loan Policy is the same as the work performed for an O&E report. The majority of home equity loan transactions in Florida are currently closed using an O&E report. The cost of an O&E report to the lender is typically between $60 and $100 (this includes the cost of a search, which for the Junior Loan Policy would be an additional charge). Anecdotally, the O&E report is purported to be profitable to the companies in this business. For the $75,000 home equity loan used by Cox in the exhibits to his report, the premium for the Junior Loan Policy at the lower proposed rate ($0.86 per $1,000 of liability) would be $64.50[,] just above the low end of the range of O&E costs. Although the Junior Loan Policy provides broader coverage than the O&E report in Florida, the loss portion of the rate is small (estimated at $0.03 earlier in this report). Therefore, we conclude that my proposed rate (lower bound) of $0.86 is appropriate in Florida. The higher bound proposed rate ($1.33) would produce a premium of $99.75 in this example[,] equal to the high end of the range of O&E costs. As mentioned earlier, the cost associated with a search would be added onto the $99.75 premium. Therefore, I believe that any rate higher than $1.33 would be excessive. Unlike the Cox Report, the Milliman Report did not expressly consider the impact of an insurer's business model in the rate determination. Mr. Cox noted that setting a rate at the high end of his reasonable range "would avoid hurting insurers operating through independent agents while not necessarily hurting others." Mr. Struzzieri made no assessment of the impact his proposed rate would have on title insurers that operate through independent agents. This impact is of great concern to ATIF because it operates exclusively through independent agents, and because Subsection 627.782(1), Florida Statutes, permits the agent to retain as much as 70% of the premium. On April 30, 2004, OIR published proposed JLP rules establishing a JLP premium rate of $1.33 per $1000 of liability. Florida Administrative Weekly, vol. 30, no. 18, pp. 1788-1790. OIR general counsel Steven Parton testified that this rate was based on the Milliman Report and on "what we thought was an understanding among insurers that $1.33 per $1,000 would be acceptable to everybody. That turned out not to be true." Mr. Parton recalled that ATIF did not find the $1.33 rate acceptable.13 On September 10, 2004, OIR published a "Notice of Withdrawal" of those proposed rules. Florida Administrative Weekly, vol. 30, no. 37, p. 3784. In a letter to Ted Conner of ATIF dated August 17, 2004, OIR deputy director Lisa K. Miller explained OIR's decision to withdraw the proposed JLP rule as follows, in pertinent part: Thank you for working with the Office during the investigation of the proposed junior loan title product and the development of proposed rule drafts. At this time the Office has determined not to adopt the requested junior loan title product. Applicable statutory provisions do not specifically grant legislative authority for a rule adopting the JLP product, as required by FL Board of Medicine v. FL Academy of Cosmetic Surgery, Inc., 808 So. 2d 243, 253 (Fla. 1st DCA 2002). Additionally, Section 627.784, Florida Statutes prohibits casualty title insurance such as the JLP product.[14] Adoption of this proposed rule would therefore be arbitrary, capricious, and not reasonably related to any statue that could possibly enable the Office to adopt the JLP through a rule, in contravention of Joseph v. Henderson, 834 So. 2d 373, 375 (Fla. 2d DCA 2003). . . . By Order dated May 20, 2005, OIR approved First American's use of the ALTA Residential Limited Coverage Junior Loan Policy form, with Florida modifications, and endorsement form JR1, both dated 10/19/96. On June 3, 2005, OIR published proposed Florida Administrative Code Rule 69O-186.003 with a proposed rate of $0.86 per $1000 of liability written. Florida Administrative Weekly, vol. 31, no. 22, pp. 2029-2030. This version of the proposed rule was held to be an invalid exercise of delegated legislative authority, but only on the procedural ground that OIR had published the rule without the approval of the Commission as the agency head. Attorneys' Title Insurance Fund, Inc. and Florida Land Title Association, Inc. v. Financial Services Commission and Office of Insurance Regulation, Case No. 05-2630RP (DOAH May 17, 2006). OIR filed its notice of appeal of the summary final order in Case No. 05-2630RP to the First District Court of Appeal, but voluntarily dismissed the appeal on March 23, 2007. On June 12, 2007, the Commission approved for publication proposed Florida Administrative Code Rule 69O-186.003, again proposing a rate of $0.86 per $1,000 of liability written. The full text of the Proposed Rule is as follows: 69O-186.003 Title Insurance Rates. The following are risk rate premiums to be charged by title insurers in this state for the respective types of title insurance contracts. To compute any insurance premium on a fractional thousand of insurance (except as to minimum premiums), multiply such fractional thousand by the rate per thousand applicable, considering any fraction of $100.00 as a full $100.00. (1)(a) and (b) No change. For junior loan title insurance: The premium for junior loan title insurance shall be: $0.86 per $1,000.00 of liability written; The minimum premium shall be $50.00; The minimum insurer retention shall be 30%. This rate is approved for use with the following junior loan title insurance policy forms, copies of which are available on the Office's website www.floir.com: ALTA Residential Limited Coverage Junior Loan Policy (10/19/96)(with Florida Modifications) and ALTA Endorsement JR 1 (10/19/96); ALTA Short Form Residential Limited Coverage Junior Loan Policy (10/19/96)(with Florida Modifications), and ALTA Endorsement JR 1 (10/19/96); and Any substantially similar product that insures the same type risk. This rate does not include the $25.00 premium that shall be charged when issuing the optional ALTA Endorsement JR 2 (Revolving Credit/Variable Rate)(10/19/96) on a junior loan title insurance policy, as provided for in Florida Administrative Code Rule 69O-186.005(6)(c).[15] Eligibility for the junior loan policy shall be restricted to the following: The insured title is for land having 1-4 residential units; The junior loan must be a second or subsequent mortgage loan and must meet the definitional requirements of a "federally related mortgage loan", as defined in the Real Estate Settlement Procedures Act of 1974, 12 U.S.C. s. 2602, which is incorporated by reference and a copy is available from the Office; The junior mortgage loan amount is less than or equal to $500,000; No junior loan policy may be issued for an amount less than the full junior loan principal debt. (2) through (12) No change. On June 22, 2007, OIR published the notice of the Proposed Rule. As specific authority for the Proposed Rule, the notice cited Sections 624.308, 626.9611, 627.777, 627.782, and 627.793, Florida Statutes. The notice stated that the Proposed Rule would implement the following: Subsections 624.307(1), 626.9541(1)(h)3.a., Sections 627.777, 627.782, 627.783, 627.7831, 627.7841, 627.7845, and Subsection 697.04(1), Florida Statutes. OIR held a rule development workshop on July 24, 2007. On November 14, 2007, the Commission approved the Proposed Rule for final adoption. Petitioners' claim The Petition notes that Subsection 627.782(1), Florida Statutes, provides that at least 30% of the proposed JLP premium must be retained by the title insurer. ATIF asserts (without contradiction at the hearing) that the Legislature established this 30% minimum retention to ensure that market pressures, such as competition to attract and keep agents, do not lead title insurers to retain less premium than necessary to maintain their economic viability. Florida title insurers generally retain only the minimum 30% of the premium due to competition for agents. At the hearing, Petitioners presented a breakdown of the division of premium that would occur with the sale of a $100,000 policy if the JLP premium were set at $0.86 per $1,000. Out of a total premium of $86.00, the title insurer would receive $25.80. From this premium, the insurer must cover its expenses for issuing the JLP, generate a profit sufficient to attract and retain adequate capital investment, and set aside reserves to pay for claims. Petitioners noted that Subsection 625.111(1)(b), Florida Statutes, requires title insurers to maintain a guaranty fund of $0.30 per $1,000 of net retained liability for policies written or title liability assumed in reinsurance. On a $100,000 policy, the title insurer would be required to place $30.00 into the guaranty fund. Petitioners also noted that Section 624.509, Florida Statutes, requires title insurers to pay a premium tax of 1.75% of their gross receipts on each policy. The insurer is liable for the tax on the full premium, even though the insurer actually retains only 30% of that amount. On a $100,000 policy with a premium of $86.00, the premium tax paid by the insurer would therefore be $1.51. Petitioners concluded that when the statutory liabilities ($30.00 guaranty fund and $1.51 premium tax) are deducted from the title insurer's 30% share of the $86.00 premium, the title insurer would actually lose $5.71 on a $100,000 policy. This deficit would have to be covered by funds from the insurer's general operating budget. Mr. Conner, now ATIF's vice president and associate general counsel, testified that the $5.71 per policy loss does not address other underwriting costs, such as policy processing, the cost of operating the claims department, the general overhead of running a large business, or the return on capital required under Subsection 627.782(2)(b), Florida Statutes. Petitioners also offered evidence that the overall cost of performing the services associated with a JLP policy would greatly exceed the premium generated by the $0.86 per $1,000 rate. Mr. Conner spoke at the July 2007, workshop and tried to explain that the proposed JLP rate would not cover the expense of providing primary title services. OIR general counsel Steve Parton responded that OIR had no hard data on the cost of those functions and thus had no way of incorporating ATIF's concerns into the proposed rate. In an attempt to quantify the cost of providing primary title services for a JLP policy, Mr. Conner directed his central Florida branch staff to randomly16 select five residential properties on which a hypothetical second mortgage would be sought and to conduct a search and examination of title consistent with issuing a JLP. This analysis yielded the conclusion that primary title services, including labor costs, for a JLP policy cost a little over $100 per policy. If overhead is included, the total costs are approximately $150 per policy. Mr. Conner testified that the cost of performing these primary title services would be constant regardless of the size of the policy, and that they would have to be paid from the agent's maximum 70% share of the premium.17 On a $100,000 policy, the agent's share of the premium based on a rate of $0.86 per $1,000 would be $60.20. Mr. Conner further testified that a rate sufficient to cover the cost of the primary title services and provide a reasonable profit would be very close to the $2.00 to $2.60 range recommended by the Cox Report. Mr. Conner concluded that the agent's share would be "wholly inadequate" to compensate him for the work he must do. Mr. Conner testified that a number of ATIF's member agents represent lenders such as credit unions and community banks, and these agents will be issuing policies on second mortgages issued by those institutions. ATIF is concerned that the inadequate rate proposed by OIR could lead agents to issue the JLP without performing all the necessary title services, which would naturally increase ATIF's claims experience.18 Mr. Conner concluded that any title company offering the JLP at $0.86 per $1000 of liability, even by selling the product directly, would be offering it as a loss leader to obtain customers for other products. Petitioners contend that OIR's proposed adoption of the $0.86 per $1000 premium rate for the JLP fails to give "due consideration" to the specific ratemaking criteria set forth in Subsection 627.782(2), Florida Statutes. Petitioners contend that the proposed premium is plainly inadequate and insufficient for the JLP to exist as a self-sustaining product, and will thus require the title insurer to supplement issuance of the JLP with premium dollars collected on its other title insurance policies. Petitioners note that such a drain on premiums for these other policies was not contemplated when those policies' rates were adopted. Petitioners contend that the evidence establishes that OIR and the Commission have failed to consider the impact of the proposed premium rate on title insurance agents, including the adequacy of the rate in paying for the cost of primary title services connected with the JLP, and the agents' ability to earn a rate of return on their capital that will attract and retain adequate capital investment in the title insurance business and maintain an efficient title insurance delivery system, as required by Subsection 627.782(2)(b), Florida Statutes. Finally, Petitioners contend that the proposed JLP rule is vague and ambiguous because it provides that the JLP premium is approved for use with the named ALTA policies or with "[a]ny substantially similar product that insures the same type risk," but does not define the term "substantially similar product." OIR's response OIR's position is that it fulfilled its statutory ratemaking obligations under Subsection 627.082(2)(b), Florida Statutes, and made a rational decision to rely on the Milliman Report and the opinion of Mr. Struzzieri. Mr. Parton conceded the apparent anomaly of rejecting the OIR-commissioned, independent actuarial report of Mr. Cox in favor of a report commissioned by and based entirely on information provided to the actuary by a single company, First American. Mr. Parton also offered considered reasons for the agency's rejection of its own actuarial report. Mr. Parton testified that OIR had a number of concerns with the Cox Report. In the first place, Mr. Cox' fundamental premise regarding Florida law was inaccurate: OIR is not required to "create a rate that would fit everybody's business model." The rate promulgated by OIR need not be sufficient to guarantee profits to companies operating through agents. OIR believed that the Cox Report placed undue emphasis on setting a rate amenable to companies that worked only through agents and disregarded companies that perform direct sales even though the JLP, because it is a simple transaction, is tailored toward a direct business approach. Mr. Parton believed that Mr. Cox should have focused on a company such as First American, which was actually selling the JLP in other states and presumably could provide actual market data for use in recommending a rate. OIR also took issue with Mr. Cox' preference for setting the rate on the high side of the recommended range. The Cox Report noted that agents are free to rebate part of the rate to their customers. Relying on a rebate scheme to bring down rates hides the real cost of title insurance from both the consumer and regulator, and introduces unfair discrimination because not everyone will be able to take advantage of the rebate. OIR concluded that the existence of a rebate scheme constitutes an admission that the rate is excessive. OIR also suggested that ATIF's concern about not being able to cover expenses from the insurer's 30% share of premium could be solved by the insurer taking a greater share of the premium. OIR believed that the conceptual approach of the Milliman Report was more sound, because the agency was persuaded that the JLP bears much more resemblance to an O&E report than to a primary title insurance policy. Mr. Parton testified that during discussions with industry representatives, he had raised the question whether the JLP was really a title insurance product at all. Mr. Parton felt that the JLP was really "an [O&E] report that is trying to be dignified to the level of actually being an insurance policy, whereas an [O&E] report as it is set out in statute is not for the purposes of insurance and has a limit I believe of $1,000 for which you can make any claim against that report. Yet here we were with essentially a product that did nothing more than create an [O&E] report." OIR believed that the Milliman Report made more sense than the Cox Report because the former treated the product as OIR saw it: an O&E report with an insurance product attached. Mr. Parton pointed out that both reports relied on a great deal of actuarial judgment because the JLP is a new product to Florida. Mr. Cox arrived at his recommended rate by discounting a standard title insurance policy, whereas Mr. Struzzieri chose to rely on the costs and loss experience of a company that is actually writing this type of policy in other states. OIR concluded that the Milliman Report more consistently reflected the risk associated with the policy and the policy's intent to deal with simple transactions. Mr. Parton testified that OIR considered the statutory "reasonable margin for underwriting profit and contingencies" ratemaking factor through its reliance on the Milliman Report's analysis of O&E reports. By assuming that the costs embedded in an O&E report are covered by the price First American charges for that product, and then assuming that the cost of producing a JLP would be similar to the costs of producing an O&E report, Mr. Struzzieri was able to arrive at the concluding assumption that $0.86 per $1,000 of coverage would provide a reasonable level of profit for the JLP. OIR accepted the Milliman Report's conclusions without further inquiry into the data upon which Mr. Stuzzieri relied. Mr. Parton testified that OIR did consider all the business models in the industry, but finally chose to go with the lowest rate proposed: [T]he OIR and the Governor and Cabinet in looking at the business models, [ATIF] is a strictly agent-driven entity; that is to say, all sales are through agents. First American as well as [Fidelity National Title Insurance Company], who also sells this product and is not contesting this rate, use a combination of sales through independent agents, affiliated agencies, which are owned, if you will, by the company in direct writing. [The JLP] is a product that frankly lends itself greatly to direct writing, particularly since what you're talking about is essentially simple transactions as opposed to major transfers of title of property. So at the end of the day, in looking at what is going on, we're looking at a company, actually two companies, who are actually selling this product nationwide, have a business model which allows them to write direct, which we believe and I think it's reported reduces costs, and a company who does it strictly through agents and who is not selling this product and has never sold this product . . . [OIR] and [the Commission] in our recommendation and explanation has [sic] come to the conclusion that we have an ability here to actually set a rate that significantly lowers cost in at least limited circumstances. We have a company who is actually engaged in the business of selling this, and we have a company who has proposed a rate and had said, "I can write this rate and make a profit at 86 cents." So ultimately the decision was to go with that particular matter. Thus, OIR's position on giving "due consideration" to the ratemaking factor of "reasonable margin for underwriting profit and contingencies" found at Subsection 627.782(2)(b), Florida Statutes, as explicated by Mr. Parton, is that the statute allows OIR to set the rate at the lowest level at which any one company's actuary concludes it can make a profit.19 If the rate is set any higher, then the company that could have made a profit at the lower rate will be charging an excessive rate, to the detriment of policyholders. Mr. Parton testified that OIR was "not setting the rate for the industry as a whole. . . . I'm setting the rate we believe . . . meets all the requirements of the law, which may not be for the industry as a whole, but in fact can be adjusted if needed." OIR set great store in the fact that the $0.86 per $1,000 rate was proposed by "someone who actually engages in that business, who has engaged an actuary to take a look at the rate based upon the factors of the company who is actually doing it, and they use a direct business model." ATIF is not marketing this product anywhere in the country, and may never market it with its totally agent- generated business model. Mr. Parton stated that "due consideration was given by the fact that the insurers that are actually doing business in this matter have a business model which puts less emphasis on agent generated business and more on direct writing . . .". Mr. Parton noted that one factor leading to the adoption of the proposed rate was the availability of the "rate deviation" process set forth in Section 627.783, Florida Statutes. See Finding of Fact 8, supra, for the statute's text. Mr. Parton testified that Mr. Cox erred in not taking note of the rate deviation statute in his recommendation: ... Florida law allows any insurer to petition for deviation from a promulgated rate, and that's one of the things that, frankly, I believe Mr. Cox did not consider in setting this rate. If, in fact, the rates were set too low for [an] insurer operating through independent agents, and that insurer felt that it hurt him to be able to charge that, that insurer has the ability to petition for deviation and to have a rate set higher than that based upon what they have petitioned. . . . All they have to do is petition the Office pursuant to the statute, prepare whatever documentation under oath they feel supports what they need, and the Department [sic] will make a determination whether or not that justifies a higher rate.[20] * * * . . . It is not necessary for us to take into account the whole industry in adopting a rate when, in fact, the law particularly contemplates that that rate is not necessarily going to be the same for everybody and allows for companies who have a different business practice and different approach to present that to the Office for approval to charge a different rate. And if that's what [ATIF] wants to do, that's fine. So, it's difficult for me to understand how they're adversely impacted by that. Mr. Parton asserted that the rate deviation statute was especially significant to OIR's analysis because Chapter 99-286, sec. 13, Laws of Florida, changed the provision from an industry-wide deviation to one applying to a single applicant, meaning that for the first time the Legislature had authorized more than one rate for each type of title insurance.21 Mr. Parton testified that OIR considered the statutory "loss experience and prospective loss experience" ratemaking factor by holding a rate hearing to which the entire industry was invited, as well as by considering the Cox and Milliman Reports, both of which took loss experience into consideration. Mr. Parton testified that OIR's consideration of the statutory "past expenses and prospective expenses" ratemaking factor was essentially confined to its reliance on the Milliman Report's actuarial judgment in basing the potential costs expenses for the JLP on the costs and expenses associated with an O&E report. Mr. Parton testified that OIR's consideration of the statutory "defalcation" ratemaking factor consisted of adopting the Milliman Report's finding that there is virtually no danger of defalcation with the JLP product because the refinancing would almost always be handled by a bank, eliminating the danger of money passing through the hands of an agent. In summary, OIR's defense of proposed Florida Administrative Code Rule 69O-186.003(1)(c) is premised on its acceptance of the Milliman Report. This acceptance in turn reflects acceptance of the core concept of that report: that the JLP more resembles an O&E report than it does a traditional primary title mortgage policy. Expert testimony on the Milliman Report Dr. Nelson R. Lipshutz testified on behalf of Petitioners as an expert in the economics of the title insurance industry. Dr. Lipshutz has decades of experience in the design and implementation of title insurance statistical plans and ratemaking, including having designed ALTA's Uniform Financial Reporting Plan and Uniform Statistical Plan, which are used as the basis for title insurance regulation in roughly half of the United States. He collects data on behalf of rating bureaus in three states, has served as a consultant for several state departments of insurance (including Florida's) and is the author of a textbook, The Regulatory Economics of Title Insurance. Dr. Lipshutz was retained by ATIF to analyze the Milliman Report. At the hearing, Dr. Lipshutz explained that, unlike other lines of insurance, title insurance is not a loss reimbursement activity; rather, it is a loss prevention activity. Title insurance does not insure against some future contingency, but looks to the past to insure the state of title at a particular point in time. Relative to other lines of insurance, losses consume a small portion of the premium. With title insurance, more of the premium goes toward searching the title in a very complete way. Dr. Lipshutz stated that in most casualty lines, the amount of premiums going out in losses is between 60% and 110%, whereas the losses for title insurance are between 3% and 10%. Because such a small percentage of the title insurance premium goes to the underwriter, the losses are still significant, but loss prevention costs drive the rate for title insurance. In examining the Milliman Report, Dr. Lipshutz first critiqued Mr. Struzzieri's loss calculation, which was based on five years (1999 through 2003) of First American's experience writing JLPs. Mr. Struzzieri had data from First American as to its total liability written in each of those years, and the actual losses incurred on those policies up to June 2003. He also had national loss data averages developed by Milliman to predict the percentage of overall expected losses that were represented by those actual losses as of June 2003. These numbers allowed Mr. Struzzieri to calculate projected ultimate losses for each year, including a projected ultimate loss per $1,000 of liability. Mr. Struzzieri's ultimate projection was an expected loss of $0.03 per $1,000 of liability for the JLP. This projection included two years, 2001 and 2003, for which Mr. Struzzieri had no loss data and thus projected zero losses on over $6 million in liability written. At the outset, Dr. Lipshutz noted that title insurance has a long tail line, meaning that losses take a long time to come in. Unlike auto insurance, where the losses are fairly well known during the policy year, the tail on title insurance can go out for 20 years. The losses in title insurance must be projected and Mr. Struzzieri was conceptually correct in attempting a loss projection. Dr. Lipshutz faulted Mr. Struzzieri's projection for including the "highly unlikely" scenario of policy years with zero losses. Dr. Lipshutz also noted that the estimated losses for 1999, the earliest year in the report and therefore the year with the most fully developed losses, were $0.14 per $1,000, almost five times Mr. Struzzieri's overall projected loss for the JLP. Dr. Lipshutz was also critical of Mr. Struzzieri's use of national data because title insurance is "highly geographically idiosyncratic." Factors that can lead to losses in Florida, such as navigational servitudes, are insignificant in a state such as Arizona. Dr. Lipshutz found no discussion in the Milliman Report of the Florida market, as opposed to general comments on the title insurance industry. Dr. Lipshutz also noted that mortgage fraud is "endemic" in Florida. The state ranks first in the nation in mortgage fraud, with a rate twice the national average in 2006. Because a JLP is essentially insuring the identity of the property owner, fraud and identity theft in Florida should not be ignored in any loss calculation. Finally, Dr. Lipshutz faulted Mr. Struzzieri's loss calculation for failing to account for the cyclical nature of title insurance. When the real estate market is doing well, the losses on title insurance are low. When the market goes down, there are large spikes in the loss ratios. Dr. Lipshutz stated that the five years included in Mr. Struzzieri's analysis were some of the best years ever in the real estate industry. Using a mere five-year experience base will not lead to a good result unless the analysis accounts for the fact that the years under review are very strong for the market, and factors in the inevitable down cycles of the market. Dr. Lipshutz believed that Mr. Struzzieri's analysis gave insufficient consideration of what will happen in a downturn. Dr. Lipshutz next critiqued the Milliman Report's expense calculation or, rather, its lack of an expense calculation. After describing the "minimal level of work" involved in the issuance of a JLP, Mr. Struzzieri noted that it would be difficult to quantify the cost of the work because "solid expense data is not available." Therefore, Mr. Struzzieri looked to expense data for O&E reports as his point of comparison for deriving a JLP expense estimate. The problem with this approach, according to Dr. Lipshutz, was that Mr. Struzzieri also lacked "solid expense data" for O&E reports. Mr. Struzzieri's analysis is "extremely simple" and based on a series of assumptions that lack empirical support. First, Mr. Struzzieri assumes that "the level of work involved in issuing a Junior Loan Policy is the same as the work performed for an O&E report." Nothing in the Milliman Report attempts to quantify the expenses involved in issuing a JLP beyond the assertion that the work is the same as that involved in issuing an O&E report. Having made that assumption, Mr. Struzzieri then asserts that the cost of an O&E report to a lender is usually between $60 and $100. The Milliman Report provides no data to support that assertion. At the hearing, Mr. Struzzieri conceded that he had no supporting data for the $60 to $100 cost range and testified that an unnamed employee of First American gave him those numbers during a telephone conversation. Dr. Lipshutz testified that his own casual Google search of O&E prices in Florida turned up figures ranging from $125 to $250. While acknowledging that his search did not produce a scientific sample, Dr. Lipshutz rightly contended that it nonetheless called into question the validity of the upper end of Mr. Struzzieri's cost range. Finally, Mr. Struzzieri makes an assumption, based on anecdote, that O&R reports are profitable to the companies in that business. The Milliman Report does not include the anecdotes on which this assumption is based. Dr. Lipshutz thus described the Milliman Report's analysis as a conclusion reached at the end of a string of unsupported assumptions: if one assumes that the level of work for a JLP equals that for an O&E report, and assumes that the cost of an O&E report is between $60 and $100, and assumes that the companies make a profit by charging between $60 and $100, then one may assume that a JLP rate that provides the same revenue (calculated by Mr. Struzzieri to be between $0.86 and $1.33 per $1,000 on a $75,000 loan) would be profitable. Because the Milliman Report contained no data to allow one to test the reasonableness of its assumptions, Dr. Lipshutz concluded that the report's findings were unsupported and unreliable. Dr. Lipshutz disputed that a JLP is directly comparable to an O&E report, or at least the notion that such a comparison may be assumed without proof. He pointed out that an O&E differs from a JLP "even on the simplest financial terms." Because an O&E report is not an insurance product, no premium tax is charged on it. Dr. Lipshutz was not certain whether the issuer of an O&E report is required to maintain a guaranty fund, but noted that any such contribution would be negligible because the liability on an O&E report is limited to $1,000. The analysis discussed at Findings of Fact 35 and 36, supra, was performed at Dr. Lipshutz' request. As noted above, ATIF calculated that performing primary title services, including labor costs, for a JLP policy would cost slightly more than $100 per policy, and about $150 if overhead costs are included. ATIF performed the same calculation for an O&E report and found that the production cost would be just under $50 per policy, and just over $100 if overhead is included.22 Included in Dr. Lipshutz' written report were two charts produced by ATIF to support its calculation of the difference in cost between a JLP and an O&E report. The first chart showed the differences in coverage between the two products: Coverage JLP O&E Limit of liability $500,000 $1,000 Ad valorem taxes Yes No Gap coverage Yes No Encumbrances created by or liens against current owner Yes Yes Encumbrances created by or liens against prior owners Yes No Closing protection letter (CPL) coverage for failure of agent to follow lenders' closing instructions Available at no additional charge Not available CPL coverage for fraud or dishonesty of agent in handling lenders' funds or documents Available at no additional charge Not available Revolving credit/variable rate endorsement Available for $25 Not available Retain evidence of determination of insurability and premium charged for seven years Yes No The second chart showed the tasks required to produce a JLP and an O&E report:23 TASK JLP O&E Collect documents from recorder's office relevant to the property AFTER date of last deed or mortgage Yes Yes Collect documents from recorder's office relevant to the property BEFORE date of last deed or mortgage Yes No Check validity of documents Yes No Collect documents from courts for names in ownership AFTER date of last deed or mortgage Yes Yes Collect documents from courts for names in ownership BEFORE date of last deed or mortgage Yes No Check probate and foreclosure cases Yes No Check identity in case of common name Yes No Check for tax liens recorded AFTER date of last deed or mortgage Yes Yes Check for tax liens recorded BEFORE date of last deed or mortgage Yes No Check city and county tax offices for taxes owed Yes No Prepare O&E report No Yes Prepare commitment Yes No Downdate search before closing Yes No Review closing documents for compliance with conditions in commitment Yes No Review closing documents for compliance with lender's closing instructions Yes No Prepare policy Yes No Downdate search after recording and issue JR-1 and/or JR-2 endorsement Yes No From this data provided by ATIF, Dr. Lipshutz concluded that the extra work makes the cost of producing a JLP 85% higher than the cost of producing an O&E report, and corresponds to a rate of $2.52 per $1,000 of insured liability. Even accepting Mr. Struzzieri's range of reasonable rates ($0.86 to $1.33 per $1,000 of liability written), applying this 85% cost factor would change the range to $1.59 to $2.46 per $1,000 of liability. Dr. Lipshutz noted that this range overlaps significantly with the range of $2.00 to $2.60 per $1,000 recommended in the Cox Report. Dr. Lipshutz termed "specious" the statement in the Milliman Report that "[t]he proposed Junior Loan Policy rates are 74% to 85% lower than the $5.75 rate, lower percentages than that indicated by the loss experience (i.e., 90%)." Dr. Lipshutz stated that this statement would be reasonable in the context of auto insurance, where the primary concern is loss reimbursement: if the loss is 90% lower, then the rate should be 90% lower. However, in this case it is "downright silly" to tie rates to losses because loss prevention, not loss reimbursement, drives expenses in title insurance. As noted above, OIR contended that if an underwriter took a larger split of the premium from its agents, or wrote the policies directly, then the $0.86 per $1,000 rate for the JLP would be adequate. Dr. Lipshutz called this contention "violently incorrect." He stated that it is a "specious distinction" to say that a rate could be adequate for a direct writer but inadequate for an underwriter working through agents. Certain core title services must be performed, certain reserves must be set aside, and certain losses will have to be paid regardless of the premium split between the agent and underwriter. If the premium is not large enough to cover all of those costs, the rate will be inadequate regardless of the insurer's business model. As a secondary matter, Dr. Lipshutz noted that it is difficult for underwriters to dictate changes in the premium split to their agents. The market is competitive, and agents will walk away from an insurer that attempts to take more than the statutory 30% split of the premium. Many agents write for multiple insurers, and would likely direct most of their business toward those who were most generous in their premium splits. Dr. Lipshutz did not believe that changing the split is a practical way to solve the rate adequacy problem even from the underwriter's standpoint. Dr. Lipshutz was also critical of OIR's suggestion that dissatisfied insurers could avail themselves of the rate deviation statute, because it is difficult if not impossible to charge a significantly higher price than that charged by other participants in a competitive market. Dr. Lipshutz testified that rates are supposed to be based on industry averages, and thus disputed OIR's theory that a rate is "excessive" for any company that could offer the product for less than the promulgated rate. In a system of regulated competition as described by Dr. Lipshutz, it is a certainty that some companies are going to make more money than others at the promulgated rate. Those companies that cannot make a profit at the promulgated rate will drift out of that line of business. Those companies with high profits will invest more in their business, improving their technology and workflow. The profits and increased efficiency of these companies will appear in the industry data presented to the regulator, which will then fulfill its statutory mandate and lower the rate. However, if the initial rate is set so low that only one firm can sell the product at a profit, all of the other insurers are immediately knocked out of the market. Competition in the title insurance market is based on service as well as price, but the service element of competition would be wiped out by the low rate. Dr. Lipshutz was skeptical of the idea that a title insurer could offset an inadequate JLP premium with other charges because this product will be sold mostly to banks and other large institutional carriers, which have the leverage to resist paying extra charges above the statutory premium rate. Mr. Struzzieri testified at the hearing, after Dr. Lipshutz, to explain his methodology and defend the Milliman Report. He explained that he was contacted by First American to provide a rate analysis for filing with OIR. He reviewed the Cox Report and documents filed by First American in response to the report. Because there was no Florida experience on which to base his calculation, Mr. Struzzieri looked for other benchmarks and decided that the most relevant other experience would be JLP experience in other states. He examined the JLP loss experience of First American in other states and estimated an expected loss of $0.03 per $1,000 of liability written. This contrasted with an expected loss in the range of $0.20 to $0.30 per $1,000 on an original owner's or lender's policy. Mr. Struzzieri noted that, all things being equal, lower losses should result in a lower rate for the product. He agreed with Dr. Lipshutz that in title insurance, underwriting expenses are a more significant factor than expected losses in setting rates. Based on his understanding of the JLP product and what it covers, Mr. Struzzieri concluded that there is less work involved in the JLP than in a primary title policy and therefore less expense. Mr. Struzzieri's understanding was that the JLP "is intended for simple transactions such as, you know, a home equity loan, and that the lender on home equity loans is going to be performing the closing services as opposed to the title agent or the title company, the title insurers." This direct performance of closing services by the lender would eliminate the risk of defalcation by the title insurer or its agents, thus further driving down the cost of the JLP. Mr. Struzzieri stated that First American had no specific expense data for the JLP that would permit him to measure the work involved in producing a policy. Therefore, he needed to find other relevant data that would allow him to estimate the average cost of the work. Mr. Struzzieri's discussions with First American led him to study the O&E report, which seemed "parallel" to the JLP, such that the amount of work involved in the JLP could be assumed equivalent to the amount of work needed to produce an O&E report.24 Mr. Struzzieri decided to use O&E report costs as a proxy for the expense portion of the JLP product. First American told him that O&E report costs were between $60 and $100. Mr. Struzzieri conceded that he had no data to support those O&E costs, and did not doubt that Dr. Lipshutz found companies offering Florida O&E reports at prices well in excess of $100. Mr. Struzzieri also conceded that First American had initially convinced him of the comparability of the JLP and the O&E report by stating that the lender "probably will not close" if any adverse matters are uncovered during the limited search envisioned by the JLP. However, further discussions with First American had clarified that another option would be to exclude the adverse matters from coverage under the JLP and allow the lender to decide whether to close. Mr. Struzzieri pointed out that he checked his recommended rate range of $0.86 to $1.33 per $1,000 against the JLP rates charged by First American in other states. He believed that a comparison to other states' JLPs was more valid than a comparison to an original issue or owner's or lender's policy because of the greatly reduced scope, coverage, and the amount of work involved in a JLP. The data provided by First American showed rates that ranged widely, from $0.73 per $1,000 in California to $3.40 per $1,000 in New Mexico. Out of 29 states listed, only two had rates lower than $0.86 per $1,000. Seventeen of the 29 fell within a range of $1.33 to $2.33. Nonetheless, Mr. Struzzieri pronounced himself satisfied that his recommended range fit reasonably within the range of rates charged in other states. Mr. Struzzieri testified that he accepted Dr. Lipshutz' estimate of the risk of fraud and had no reason to doubt Dr. Lipshutz' data on the subject. However, Mr. Struzzieri did not believe that fraud had any bearing on his calculation of a $0.03 per $1,000 loss on the JLP because fraud losses are a small percentage of total title insurance losses. He acknowledged that there may be a small fraud component that his calculation missed by using national data rather than Florida data, given Florida's higher rate of fraud, but concluded that this component would be at most incremental. Mr. Struzzieri agreed that his data on the cost and profitability of an O&E report was anecdotal and unverified, but disagreed with Dr. Lipshutz' assertion that his anecdotal information about O&E profitability was the source of his conclusion that the JLP will be profitable at the recommended range of rates. Rather, said Mr. Struzzieri, the source of his assertion of profitability was the fact that First American is writing JLP policies in 29 other states, including California at $0.73 per $1,000, and appears to be making a profit on that business. He conceded, however, that this, too, was an assumption on his part. On cross-examination, Mr. Struzzieri was asked about a document he filed at OIR in response to a 2005 title insurance data call issued by OIR. In a letter dated November 17, 2005, Mr. Struzzieri wrote "to point out what I believe are several critical deficiencies in the 2005 title insurance data call." Mr. Struzzieri wrote that the deficiencies fell into two categories: missing information and insufficient data. As to the latter deficiency, Mr. Struzzieri wrote that OIR was not asking for enough information: It is my strong belief based on my many years of working with title insurance data that 5 policy years is insufficient to make rates. Reasons supporting this belief include: Long loss development "tail" -- Title insurance policies have no expiration date; claims continue to be reported far beyond 5 years after the policy effective date. . . . Not many losses reported in first 5 years -- Milliman analysis of title industry composite loss development triangles indicates that only a small percentage of total losses from policy years 2000 through 2004 are expected to have been reported as of December 31, 2004. For example, for policy year 2004, we would expect only 13% of "ultimate" losses to be reported by December 31, 2004. It is, therefore, my belief that policy years 2000 through 2004 are all too immature to be used in ratemaking without the benefit of additional policy years of data and will result in highly variable results. Title insurance cycle Milliman analysis of title insurance profitability indicates that title insurance is cyclical in nature. Specifically, profits vary with the real estate cycle; in particular, mortgage interest rates [sic]. For example, when interest rates are falling, title insurance revenue is higher and loss ratios are generally lower. Expenses are also higher; but not as high as revenue because certain expenses are relatively fixed. Therefore, profits are generally higher. When interest rates rise, revenues fall, expenses fall (but not as fast as revenue) and loss ratios increase. As a result, profits are lower. For this reason, I believe that any title insurance rate making exercise should use as many as 20 years of data (or at least 10 years). The number of years should correspond to a full real estate cycle. The 5 policy years included in the data call correspond to the lowest interest rates in the last 40 years. Therefore, the profits are likely much higher than an average year. When the real estate cycle turns (and there [are] indications that it soon may), the title industry may face losses. By using only the last 5 years, the OIR will be applying rates based off of the most profitable years and applying them to perhaps some very unprofitable years. However, if instead rates were based on 10, 15 or better yet 20 years of data, the OIR will have captured a complete cycle and will have made rates that are appropriate in the long run and, on average, for each individual year of the cycle. Mr. Struzzieri acknowledged his prior opinion that five years of data provides an insufficient basis for ratemaking, especially when those years were so recent that ultimate losses are uncertain. He further acknowledged that his own recommendation for a range of JLP rates was in part based on projected loss data from five years of recent First American policies. Mr. Struzzieri explained this apparent contradiction by noting that, as to primary title insurance, companies have sold the products in Florida for 50 to 60 years and typically report 20 years of data. As to the JLP, First American only had the five years of data used by Mr. Struzzieri. He agreed that more data would be better, but he used what was available. Summary Findings When it decided to commence rulemaking to set a premium rate for the JLP, OIR commissioned The David Cox Company to prepare an actuarial report on the rates and forms for the proposed JLP. The Cox Report recommended a rate ranging from $2.00 to $2.60 per $1,000 of liability, based on Mr. Cox' comparison of the JLP to a standard title insurance policy. Mr. Cox advocated setting the rate on the high end of the recommended range to avoid hurting insurers that operate through independent agents. OIR reviewed the Cox Report and found it flawed. OIR believed the Cox Report's recommended rate range was too high, because Mr. Cox overemphasized protecting companies that operate through agents, when the JLP appears more amenable to direct sales. OIR disapproved of Mr. Cox' rebate strategy for holding down rates, his assumption that the insurer is always bound to accept the 30% minimum premium split with its agents, and his failure to focus on actual market data generated by companies that are selling the JLP in other states. All of OIR's criticisms of the Cox Report's methodology and conclusions were reasonable concerns voiced by the regulatory entity charged with the responsibility to set a premium rate for the JLP. OIR had misgivings about whether the JLP qualified as an insurance product at all, and therefore found the Cox Report's conceptual strategy of "backing out" a JLP rate from the standard title insurance rate less than persuasive. The preponderance of the evidence at the hearing established that OIR's decision to reject the recommendations of the Cox Report was reasonable. OIR has freely conceded that the Proposed Rule is entirely dependent on the Milliman Report, with its recommended range of rates between $0.86 and $1.33 based on First American's experience in other states and the close comparison of the JLP to a non-insurance product, the O&E report. OIR's position, as elucidated by Mr. Parton, is that Section 627.782, Florida Statutes, allows OIR to base its ratemaking decision exclusively on an actuarial analysis conducted on behalf of one company, based on data derived exclusively from that company. OIR is under no obligation to set a rate for the industry as a whole, because any insurer that does not believe it can make a profit at the promulgated rate may petition for an upward deviation pursuant to Section 627.783, Florida Statutes. The rate should be set at the lowest level recommended by any single company's actuary, to ensure that no company can charge an excessive rate. ATIF demonstrated that it cannot profitably sell the JLP at the $0.86 rate set forth in the Proposed Rule. The insurer's 30% share of premium on a $100,000 policy ($25.80) is insufficient to cover its statutory liabilities ($30.00 to the guaranty fund and $1.51 premium tax), let alone its other underwriting costs. The insurer would be required to cover the losses with premiums from other policies.25 Mr. Parton pointed out that the insurer could solve this problem by forcing its agents to accept a 60-40 premium split. However, Dr. Lipshutz convincingly testified that such an imposition is not easily accomplished in a competitive market. Agents would either walk away or steer their less desirable risks toward that insurer. Further, ATIF showed that the cost of performing primary title services for a JLP policy would be a little more than $100, whereas the agent's 70% share of premium on a $100,000 JLP policy at the $0.86 rate would be only $60.20.26 Cutting the agent's share to 60% would merely shift more of the loss for a $100,000 policy onto the agent. However, because the agent's costs are fixed, his 70% share would more than cover expenses on a policy written for $167,000 or more. At a 60% share, the agent would not cover expenses on any policy worth less than $195,000. Mr. Conner of ATIF and Barry Scholnik of Stewart Title agreed that no company could issue the JLP for $0.86 per $1,000 and make a profit, and that a company selling the JLP at that rate would be offering it as a loss leader. OIR countered that ATIF is not marketing the JLP anywhere in the country, and may never do so. OIR asserted that it was entitled to rely on the fact that the $0.86 per $1,000 rate was proposed by a company that is actually selling the JLP throughout the country and has engaged an actuary to make a recommendation based on actual market data. First American maintains that it can generate a profit at the proposed rate through its direct business model. The Florida JLP purchaser should not be forced to pay higher rates in order to subsidize the less efficient "member agent" business model of ATIF. Petitioners' expert, Dr. Lipshutz, discussed at length his dispute with Mr. Struzzieri's loss projection of $0.03 per $1,000 of liability for the JLP. Dr. Lipshutz made valid points regarding the long tail line and cyclical nature of title insurance versus the very recent five years' data employed by Mr. Struzzieri, which included the unlikely projection of two years with zero losses. Mr. Struzzieri conceded that his loss data from First American was not optimal. However, both experts agreed that loss experience is not the driving force in setting title insurance rates. Additionally, Mr. Struzzieri's point that defalcation losses will be virtually nonexistent with the JLP was not effectively countered by Dr. Lipshutz. Even conceding the validity of Dr. Lipshutz' critique, Mr. Struzzieri persuasively argued that any upward projection of the loss projection would have an insignificant effect on the recommended range of rates. The experts and industry witnesses agreed that expenses are the main driver of title insurance rates. Dr. Lipshutz disputed that Mr. Struzzieri performed an expense calculation at all, and certainly questioned every expense assumption upon which Mr. Struzzieri ultimately based his rate recommendation. Mr. Struzzieri first assumed that expense data for O&E reports would provide a reliable basis for a JLP expense estimate. He was forced to use this assumption because First American could provide him with no specific expense data for the JLP, a fact that undercut the rationale for OIR's reliance on the Milliman Report as based on real industry data from a company actually selling the JLP. In fact, Mr. Struzzieri used First American's JLP price data from other states only after the fact as a tool to check the reasonableness of his rate recommendation. The evidence is not entirely clear whether Mr. Struzzieri independently reached the conclusion that the two products are equivalent, or whether this assumption was provided by First American. The Milliman Report does not explain the basis for its assumed equivalence of the O&E report and the JLP beyond a simple assertion that the "level of work . . . is the same" for the two products. At the hearing, Mr. Struzzieri merely stated that he found parallels between the O&E report and the JLP that allowed him to assume their equivalence. Mr. Conner of ATIF testified that the tasks necessary to issue a JLP are "not even close" to those employed to produce an O&E report. In support of this position, Petitioners offered a detailed, step-by-step review of the JLP process versus the process involved in producing an O&E report. This review led Dr. Lipshutz to conclude that the cost of producing a JLP would be 85% higher than the cost of producing an O&E report. Dr. Lipshutz' analysis on this point was credible, the more so because OIR offered no serious criticism of or alternative to Petitioners' evidence regarding the extensive differences between the production process for the two products. The preponderance of the evidence produced at the hearing established that the Milliman Report's assumption of equivalence between the JLP and an O&E report was simply wrong. Even if it were granted that the cost of an O&E report is comparable to that of a JLP, Mr. Struzzieri's assertion that the cost of an O&E report to a lender is usually between $60 and $100 was unsupported. At the hearing, Mr. Struzzieri conceded that he had no supporting data for the assertion and was unable to name the First American employee who gave him those numbers. Dr. Lipshutz' sworn testimony that he found O&E price quotes in Florida ranging from $125 to $250 was admittedly anecdotal but even so was at least as credible as Mr. Struzzieri's undocumented hearsay cost data from an unnamed source. The preponderance of the evidence produced at the hearing established that the Milliman Report's statement of the cost of a typical O&E report was an assumption lacking empirical support. The unsupported assumptions regarding the comparability of the JLP to the O&E report and regarding the cost of an O&E report render the Milliman Report's rate recommendation a speculative exercise, not the basis for an industry-wide JLP rate. Mr. Parton testified that Mr. Struzzieri employed a great deal of actuarial judgment in making his recommendation because the JLP is a new product to Florida, and that OIR was entitled to rely on that actuarial judgment. However, Mr. Struzzieri himself qualified his report with the following: In performing this analysis we have relied on data and other information provided to us by First American Title Insurance Company. We have not audited, verified, or reviewed this data and other information for reasonableness and consistency. Such a review is beyond the scope of our assignment. If the underlying data or information is inaccurate or incomplete, the results of our analysis may likewise be inaccurate or incomplete. (Emphasis added) Petitioners did not question Mr. Struzzieri's actuarial judgment. They questioned the underlying data provided by First American to Mr. Struzzieri, and showed that data to be unsupported in the case of the JLP/O&E comparison, and unverifiable in the case of the O&E costs. Mr. Struzzieri's qualifying statement acknowledges that his conclusions are only as good as their underlying information. OIR may have been entitled to rely on the Milliman Report at the time the Proposed Rule was published, before the agency was aware of the report's flaws. However, this rule challenge hearing is a de novo proceeding, not a review of OIR's past actions. At the hearing, Petitioners established that the Milliman Report was based on faulty assumptions and inadequate data. OIR failed to respond adequately to the objections raised by Petitioners. OIR simply reiterated its position that it had the discretion to rely on Mr. Struzzieri's actuarial analysis, without really answering Petitioners' evidence that the assumptions undergirding the analysis were unsubstantiated. OIR essentially adopted the Milliman Report as its own. Mr. Parton testified that as to each of the "due consideration" ratemaking factors listed in Subsection 627.782(2), Florida Statutes, OIR derived its conclusions largely from the Milliman Report. Whatever the merits of OIR's legal reasoning regarding its statutory ratemaking responsibilities, OIR's reliance on the Milliman Report to meet those responsibilities was misplaced. OIR's only response to Petitioners' sustained attack on Mr. Struzzieri's assumptions was to reiterate its reliance on the Milliman Report. The preponderance of the evidence established that the Proposed Rule was based on unsupported data and was, therefore, arbitrary.
