The Issue The issues are whether Respondent, as a licensed insurance agent, is guilty of various violations of law in the sale of an annuity policy and the failure to remit to the insurer $4607.22 in premiums, and, if so, what penalty should be imposed.
Findings Of Fact At all material times, Respondent has held licenses as a life and health agent (2-18) and health insurance agent (2-40). Respondent has held licenses issued by Petitioner or its predecessor agency for 21 years. Respondent has never been disciplined, except for a consent order dated February 25, 2008, requiring Respondent to pay a $250 administrative fine for failing to comply with the continuing-education requirements for the period ending November 30, 2007. Daphne Isaacs, who was born in 1940, moved from Jamaica to the United States in 1970. She completed the equivalent of high school while in Jamaica. For many years, Ms. Isaacs worked as a collateral clerk in the accounts receivable department for CIT in New York. Formerly known as Commercial Investment Trust, CIT is a finance corporation. During the period described below, Ms. Isaacs resided with her daughter and her daughter's husband. Also living in the home were two disabled sons of Ms. Isaacs, who was their primary means of support. While employed by CIT, Ms. Isaacs participated in a pension plan. In 1995, Ms. Isaacs suffered injuries in an accident and drew benefits from a long-term disability policy for the next ten years. Retiring from CIT in 2005, Ms. Isaacs elected a cash payout of $124,000, rather than annuity-like payments, from her pension plan. At the time of her retirement, Ms. Isaacs also had a 401(k) plan, but she later closed this account. From 2005 to present, Ms. Isaacs' sole sources of income were the investments described below and the Social Security Administration, which paid her about $12,000 annually. On June 21, 2005, Ms. Isaacs invested $90,000 in an AXA Equitable annuity policy and purchased certificates of deposit from Wachovia Bank with $20,000-$25,000 of the remaining $34,000. Although she knew Respondent at the time through church, Ms. Isaacs decided instead to invest with an AXA Equitable insurance agent located at the Wachovia Bank branch where she conducted business. One year after the issuance of the AXA Equitable annuity policy, the insurance agency employing the agent represented to the insurer that it had issued Ms. Isaacs the wrong annuity policy. After the insurance agency delivered an indemnification to AXA Equitable, on July 6, 2006, AXA Equitable retroactively changed Ms. Isaacs' policy to a policy with a guaranteed minimum income benefit. Several factors belie the agency's claim that it had issued the wrong policy. First, the AXA Equitable agent testified at the hearing. He is a highly competent professional who is attentive to detail. It is highly unlikely that he would have permitted the agency to order and the insurer to issue the wrong policy. Second, Ms. Isaac's application for the guaranteed minimum income policy was dated June 17, 2006. One would expect that the application would have been dated in 2005, or else the agency might not have been able to confirm that Ms. Isaacs actually had applied for the guaranteed minimum income policy in 2005. In a striking example of thoughtful ambiguity, the AXA Equitable agent testified that he sold the guaranteed income policy in "2005 or 2006." On these facts, it is at least as likely that, after purchasing the original AXA Equitable annuity policy, Ms. Isaacs told her agent that she changed her mind and demanded the guaranteed minimum income annuity policy, and the agency did what it had to do to effect this change at no cost to Ms. Isaacs. At the time of the 2005 and 2006 transactions, the AXA Equitable agent explained to Ms. Isaacs that the annuity policies that she was purchasing were long-term investments and imposed substantial cash surrender penalties for several years. The AXA Equitable agent also explained that she could rescind the transactions, at no cost, for a short period after receiving the annuity policies. Ms. Isaacs understood these disclosures. Notwithstanding her knowledge of the cash surrender penalties attached to her AXA Equitable annuity policy, Ms. Isaacs decided to cancel this policy and replace it with the AIG annuity policy. The primary reason for the switch was Ms. Isaacs' need for monthly income payments--and, of course, her decision to maintain a large fraction of her financial resources in an annuity policy. The need for more frequent payments of income arose, ironically, by Ms. Isaacs' decision, four months earlier, to exchange her original AXA Equitable annuity policy for the AXA Equitable annuity policy with guaranteed minimum income. This decision changed Ms. Isaacs' income payments from monthly to annual. Compare Section 7.01 with the second paragraph under "Conditions of this Rider." As a model of succinctness, the AIG annuity policy admitted into evidence seems to omit any provision concerning the frequency of income payments, but Respondent testified that it paid income monthly, and an AIG brochure accompanying the policy advises that "[i]ncome payments are usually made monthly." This is early evidence of Ms. Isaacs' bad decisionmaking as to her annuity investments. Ms. Isaacs failed to establish by her testimony any fault on Respondent's part in her purchase of the AIG annuity policy. Ms. Isaacs admitted that, in trying to make the sale, Respondent suggested that he, she, and the AXA Equitable agent meet to discuss the two annuity policies. Respondent's testimony that he warned Ms. Isaacs of the cash surrender penalty on the AIG policy, as reflective of its status as a long-term investment, is credited over the testimony of Ms. Isaacs that he failed to make this disclosure. Respondent candidly admitted that he did not know if the AXA Equitable policy had a cash surrender penalty, but his failure to mention this fact is irrelevant because Ms. Isaacs knew that this policy carried such a charge, as she had received this warning, for a second time, from her AXA Equitable agent just four months earlier. It is unclear whether Respondent specifically mentioned the 30-day free look period for the AIG policy. As was the case with the cash surrender penalty, though, the AXA Equitable agent had recently explained a similar provision in the AXA Equitable policy, so Ms. Isaacs was aware of the existence of such a provision. More importantly, this provision was featured prominently on the first page of the AIG policy immediately below the contract data, so any testimony from Ms. Isaacs that she did not know about this provision cannot be credited. Ms. Isaacs also testified that Respondent failed to deliver timely her election to cancel the AIG annuity policy. She purchased the policy on October 24, 2006. By contract, Ms. Isaacs had 30 days from receipt to cancel the AIG annuity at no cost. The record does not contain documentary evidence of the date on which Ms. Isaacs received the AIG annuity policy. Respondent recalled meeting with Ms. Isaacs three times: to deliver the policy, to have her sign the "ownership change form," and to have her sign or receive additional forms. The testimony suggested that these events occurred in this sequence. The "ownership change form" is the Request to Transfer Funds, which Ms. Isaacs signed on October 24. The evidence thus fails to establish that Ms. Isaacs received her copy of the AIG annuity policy after October 24. At different times, Ms. Isaacs has offered different versions of when she tried to cancel the AIG annuity policy. In an undated letter to AIG (Petitioner Exhibit 24), Ms. Isaacs claimed that she told Respondent on November 7, 2006, that she wanted to cancel the annuity policy that she had purchased two weeks earlier. At hearing, Ms. Isaacs testified that she first tried to cancel the annuity policy on December 7, 2006. A letter from Ms. Isaacs to AIG dated May 23, 2007, briefly mentions her attempt to cancel the annuity policy in December 2006, but focuses mostly on her receipt of a check for $833 in January 2007 and her inability to live off 3.5% annual income. Referring to the low interest rate of the AIG annuity policy, the letter states: "I needed this issue to be resolved or my money moved back to AXA and my $6300 (AXA Equitable cash surrender fee) returned to me." On this record, it is impossible to find that Ms. Isaacs unequivocally attempted to cancel the AIG annuity policy at anytime during the 30-day free look period. The May 2007 letter also suggests that Ms. Isaacs had decided, after purchasing the AIG annuity policy, that the frequency of income payments was not as important as the interest rate paid under the policy. For a complainant, Ms. Isaac was an oddly uncooperative witness. Her evasiveness at the hearing is consistent with some discomfort at testifying that she could recall nothing, except that she trusted Respondent, or that Respondent hounded her into purchasing the AIG annuity policy. Neither claim harmonizes easily with the fact that Ms. Isaacs resisted Respondent's sales efforts 18 months earlier when she purchased the first AXA Equitable annuity policy. Three or four times, when responding to a question, Ms. Isaacs paused to recall the facts and appeared ready to start an answer--before retreating to her preferred response of claiming not to remember and that she had trusted Respondent. Even after the Administrative Law Judge warned her to be more responsive, Ms. Isaacs continued to respond evasively to questions. In its proposed recommended order, Petitioner claims that Respondent replaced a qualified annuity policy with an nonqualified annuity policy, thus potentially exposing Ms. Isaacs unnecessarily to income tax liability. This is a potentially serious claim, but one that was not made in the Administrative Complaint. The Administrative Complaint alleges that Respondent failed to explain how the AIG annuity policy would affect her income, but the omission of any mention of "taxable income" guides the reader to consideration of such issues as guaranteed interest rates and cash surrender penalties. Petitioner may thus not predicate liability on the tax treatment of the exchange of annuity policies. Even if the Administrative Complaint had alleged a failure by Respondent to explain the tax treatment of the exchange of the AXA Equitable annuity policy for the AIG annuity policy, Petitioner's proof would have been insufficient. Respondent testified that he explained to Ms. Isaacs that the AIG policy was nonqualified, but, given Respondent's long history in industrial life insurance, as discussed below, and his general knowledge level, it is doubtful whether Respondent understands the difference between a qualified and nonqualified annuity. More to the point, Petitioner failed to prove the materiality of any change in tax status of Ms. Isaacs' annuity policy or the failure to disclose such a change. Even though the liquidation of a qualified annuity followed by the purchase of a nonqualified annuity would presumably have generated substantial taxable income, Ms. Isaacs did not pay any income tax resulting from the AIG transaction, which, as noted below, was later unwound, but not by the deadline for filing income tax returns for 2006. Petitioner does not satisfy its burden by relying implicitly on taxpayer noncompliance, in the face of comprehensive reporting requirements. On the other hand, given Ms. Isaacs' modest income, additional deductions for disabled dependents, and the vestigial progressivity of the federal personal income tax, the ongoing annuity payments would possibly escape taxation. In attempting to portray Respondent's sale of the AIG annuity policy as inappropriate, Petitioner attempted to prove that Ms. Isaacs had been justly satisfied with her (second) AXA Equitable annuity. Toward this end, the AXA Equitable agent testified that Ms. Isaacs had no complaints about her AXA Equitable product(s). But this testimony failed to account for the facts that Ms. Isaacs canceled her first AXA Equitable annuity policy after one year and her second AXA Equitable annuity policy after only four months. Given Ms. Isaacs' modest resources, her desire for monthly, not annual, income payments was reasonable and justified her preference for the AIG annuity policy over the second AXA Equitable annuity policy, notwithstanding other advantages that the second AXA Equitable annuity policy may have had over the AIG annuity policy. In the final analysis, Ms. Isaacs emerges, not as an unsophisticated annuity consumer, but as someone who could not decide what she wanted in an annuity contract, even after she had purchased several. Counting her decision to take cash rather than annuity-like payments from her CIT pension, in a little over 18 months, Ms. Isaacs changed the form of her annuity investments three times. Her long experience with security agreements held by a major finance corporation necessarily taught her two things--the importance of documentation and that there are no free lunches, especially when dealing with the financial industry. It is thus impossible to portray Ms. Isaacs as naïve in the matter of purchasing annuities. To the contrary, although Ms. Isaacs understood that annuity contracts all contained a complex set of bargained-for rights and responsibilities, she was quite willing, after closing on her purchases, to repudiate her agreements and attempt to negotiate new terms and conditions. What is noteworthy about Ms. Isaacs is her success in post-closing negotiations. As noted above, she managed, at no cost, to replace her original AXA Equitable annuity policy with the second AXA Equitable annuity policy. And, as noted below, she managed this feat a second time. Without doubt, Ms. Isaacs understood the long-term nature of annuity investments and the cash surrender penalties attached to all three of her annuity policies. Even if she somehow did not know of the 30-day free-look period attached to the AIG annuity policy, she should have known of this provision, given her recent experience with her AXA Equitable agent and the prominent disclosure of this right in the AIG annuity policy. But, for Ms. Isaacs, the free-look period extended far beyond 30 days, as reflected by these facts: 1) 18 months after purchasing the AIG annuity policy, Ms. Isaacs was still trying to negotiate, post-purchase, a more favorable interest rate and 2) AIG and AXA Equitable eventually yielded to Ms. Isaacs' demands and restored her, at no cost, to where she was immediately prior to the exchange of the second AXA Equitable annuity policy for the AIG annuity policy. Thus, Petitioner's proof concerning the adequacy of the disclosures concerning the long-term nature of the AIG contract, the cash surrender penalties of the AXA Equitable contract, and the 30-day free- look period for the AIG contract fails for another reason, unique to the circumstances of this case: in retrospect, these cash-surrender and free-look provisions were entirely immaterial to Ms. Isaacs, as neither insurer enforced its cash surrender provision, and AIG did not enforce the 30-day limit to the right to rescind. Most of Respondent's insurance career has been spent in selling industrial life insurance, which is also known as debit or burial insurance. From the insured's perspective, industrial life insurance provides low-value policies with limited death benefits and high premiums that are often collected in person by the agent. In the past, agents visited insureds to collect the premiums on a weekly basis, but agents now collect the premiums mostly on a monthly basis. Industrial life insurance imposes on the agent considerable responsibilities in collecting the premiums and remitting them to the insurer and preventing lapses through nonpayment of premiums and imposes relatively few responsibilities in originating new policies. The industry nomenclature reflects these responsibilities: sales agents are also known as debit agents, the agent's policyholders are known as the debit book, and the route to collect premiums from the policyholders is known, simply, as the debit. See NLRB v. United Ins. Co. of Amer., 390 U.S. 254 (1968); United Ins. Co. v. Dienno, 248 F. Supp. 553 (E.D. Pa. 1965). Respondent has worked with several industrial life insurance insurers that, through a series of transactions, eventually became Monumental. Over a 15-year span, Respondent was employed for two years as a sales agent, eight years as a sales manager, and four years as a district manager. While district manager of the Miami office, Respondent managed 30 sales agents handling $4 million of premiums annually. After leaving Monumental, Respondent worked about six years for AIG selling employee benefit packages and later general insurance products. It is during this latter period that Respondent sold the AIG annuity policy to Ms. Isaacs, described above. Respondent enjoyed little success and, in September 2007, perhaps fancifully describing his departure from AIG as a "retirement," Respondent rejoined Monumental as a sales agent. Assigned the only available debit, which was in Belle Glade, Respondent resided in the Miami area and had to drive 100 miles one way to reach his closest debit account. The Belle Glade debit was in bad shape when Respondent acquired it. The previous sales agent had not maintained the accounts accurately. However, Respondent soon exacerbated the situation by his own poor bookkeeping practices. Respondent admits that he did not use the laptop computer that his sales manager, Michael Weintraub, had assigned to him for use in recording payments collected on the debit and deposits in the Monumental bank account, as well as making reconciliations. Respondent testified that the laptop was too heavy to lug around and did not have enough battery power. Although Mr. Weintraub gave him an AC adapter so the Respondent's car could power the computer, Respondent complained that none of the agents used the adapter. The insubstantiality of these excuses require no elaboration. Upon receipt of payments from policyholders, the debit agent is required to issue receipts. This requirement is especially important due to the large number of cash transactions. Regardless of the form of payment, though, Monumental requires each of its debit agents to deposit in its bank account all of the collections by the end of the second day after inputting these payments into the computer. Prohibiting its agents from withholding their commissions from these deposits, Monumental pays the commissions separately after it has received the gross premiums. Each morning, Respondent left his home at 7:30 am or 8:00 am. Many debit accounts are serviced at the policyholders' homes, but many policyholders are not home until they finish work. This meant that Respondent often had to work after dinner riding his debit. Although Respondent could key in collections in an office in Belle Glade and at the few homes of policyholders equipped with the internet, Respondent often had to input the collections after returning home late into the evening or very early the following morning. Weary, Respondent invited trouble by sometimes relying on his memory, rather than notes, for making these date entries and reconciliations, which required him to allocate collections among premiums, repayments of principal on policy loans, payment of interest on policy loans, and payment of other fees and charges. Then, by 8:00 am the next day, Respondent was back on the road, again riding his debit. Respondent complained that, at some point while Respondent was assigned the Belle Glade debit, Mr. Weintraub added to Respondent's debit book more policyholders, many of whom were slow-paying and none of whose accounts had recently been audited. This complaint has more merit than the complaints about the laptop computer, but not much more. Respondent was uniquely qualified, given his years' experience in selling industrial life insurance, to examine this new business and identify shortfalls in individual accounts, but he never did so. Instead, Respondent applied his haphazard means of accounting for payments to these troublesome new accounts. Late in 2008, Mr. Weintraub decided to perform an audit of Respondent's debit book. Although Mr. Weintraub was now a district manager--a position that he held for one year before Monumental restored him to his previous position as a sales manager--he did not wish to rely on an inexperienced sales manager to perform the audit. Mr. Weintraub found errors in every account of Respondent and recommended that Monumental terminate Respondent. Without delay, Monumental did so, effective November 7, 2008, and Mr. Weintraub "turned off his computer and fired him." Following the termination of Respondent, Monumental conducted a three-month audit of Respondent's debit book, in which Mr. Weintraub or another Monumental employee visited each policyholder, and found that Respondent had issued receipts for about $4600 in premiums that had never been remitted to Monumental. Monumental paid these premiums and reinstated the three life insurance policies that had been lapsed. Many other persons claimed to have paid premiums to Respondent, but failed to produce receipts, and Monumental denied all of their claims for credit or reinstatement. Monumental subsequently demanded repayment of the unremitted $4600, and Respondent has declined to do so. Respondent seemed more intent on showing that he did not steal money than that he competently discharged his duties. Toward the end of the hearing, Respondent asked when he and a Monumental representative would get together to arrive at the exact shortfall, revealing that he may have understood that he owes at least some of the $4600, but also that he has treated casually his obligation to repay this sum. The problem for Respondent's defense as to Count II is that the evidence establishes: 1) Respondent negligently and recklessly handled his debit accounts; 2) Respondent's handling of these accounts was inexcusable, and 3) as a result, Respondent failed to remit to Monumental about $4600 in payments from policyholders, even after Monumental demanded payment of this sum. The first two findings are sufficient to establish Respondent's unfitness to engage in the business of insurance, and the third finding is sufficient to establish that Respondent unlawfully withheld money owed an insurer.
Recommendation It is RECOMMENDED that Petitioner enter a final order dismissing Count I, finding Respondent guilty of violating section 626.611(10) in Count II, and suspending Respondent's insurance licenses for 15 months. DONE AND ENTERED this 24th day of April, 2012, in Tallahassee, Leon County, Florida. S ROBERT E. MEALE Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 24th day of April, 2012. COPIES FURNISHED: David J. Busch, Esquire Department of Financial Services Division of Legal Services 612 Larson Building 200 East Gaines Street Tallahassee, Florida 32399 david.busch@myfloridacfo.com Andrew O'Niel Bryan 17635 Southwest 32nd Street Miramar, Florida 33029-2328 Julie Jones CP, FRP, Agency Clerk Division of Legal Services Department of Financial Services 200 East Gaines Street Tallahassee, Florida 32399-0390
The Issue Whether Respondent, a licensed insurance agent, committed the offenses alleged in the Amended Administrative Complaint and, if so, the penalties that should be imposed.
Findings Of Fact Petitioner is a licensing and regulatory agency of the State of Florida charged with the responsibility and duty to enforce the provisions of the Florida Insurance Code, which consists of Chapters 624-632, 634, 635, 641, 642, 648, and 651, Florida Statutes. See Section 624.307(1), Florida Statutes. Respondent has been continuously licensed in the State of Florida as a life insurance agent (a 2-16 license) and a general license agent (a 2-20 license) since March 1974, and continuously as a RPCJUA insurance agent (a 00-17 license) since March 1993. On November 4, 1996, Respondent was charged with possession of cocaine in violation of Section 893.13(6)(a), Florida Statutes. This charge, filed in Palm Beach County Circuit Court and assigned Case Number 96-12206 CFA02, is a third degree felony. On May 14, 1997, Respondent entered a plea of nolo contendere to the charge of possession of cocaine, which was accepted. Adjudication of guilt was withheld and Respondent was placed on probation for a period of 18 months. The terms and conditions of Respondent's probation included working at a lawful occupation, intensive drug and alcohol evaluation, successful completion of any recommended treatment, payment of a fine in the amount of $250.00 and court costs in the amount of $461.00, performance of 100 hours of community service, random testing for the use of alcohol and drugs, six months' suspension of driver's license, and DUI school. Respondent successfully completed his probation on November 13, 1998. Respondent continued to work as an insurance agent during the term of his probation. Respondent voluntarily reported the incident to State Farm shortly after its occurrence. As a result, State Farm placed Respondent on probation and conducted a series of random alcohol and drug tests, which Respondent satisfactorily completed. Section 626.621(11), Florida Statutes, provides that the following constitutes grounds for the discretionary discipline of an agent's licensure: (11) Failure to inform the department in writing within 30 days after pleading guilty or nolo contendere to, or being convicted or found guilty of, any felony or a crime punishable by imprisonment of 1 year or more under the law of the United States or of any state thereof, or under the law of any other country without regard to whether a judgment of conviction has been entered by the court having jurisdiction of the case. Respondent failed to report to Petitioner within 30 days of doing so that he entered a plea of nolo contendere to a third degree felony charge of possession of cocaine in Case Number 96-12206 CFA02 on May 14, 1997. On or about March 18, 1998, Respondent applied for licensure as a Variable Annuity Insurance Agent (a 2-19 license). That application contained Question 18, which provides as follows and to which Respondent answered "yes": Have you ever been convicted, found guilty, or pleaded guilty or nolo contendere (no contest) to a felony under the laws of any municipality, county, state, territory or country, whether or not a judgment of conviction has been entered. As a result of his answer to Question 18, Petitioner started an investigation, with which Respondent fully cooperated. As a result of that investigation, Petitioner learned the details of Respondent's plea in the criminal proceeding. Respondent testified, credibly, that he did not timely report the entry of his plea in the criminal proceeding because he did not know he was required to do so. 1/ Respondent has continuously worked as an insurance agent licensed by Petitioner in the State of Florida since March 1974. Respondent has been continuously appointed by State Farm and has built up a successful insurance business. This proceeding is the first disciplinary proceeding brought against Respondent's insurance licenses. There have been no other complaints filed by anyone in this state against Respondent's insurance licenses. Respondent's insurance licenses have not been previously disciplined in the State of Florida. The testimony of Respondent's witnesses established that he enjoys a good reputation for honesty, trustworthiness, truthfulness, and integrity in his community. He has engaged in charitable works, including work with the food bank, the Guardian Ad Litem Program, and Brazilian Indians. Respondent's witnesses also established that they had been pleased with their business dealings with Respondent, and that he has the ability and trustworthiness to successfully engage in the business of insurance. Respondent testified that State Farm will terminate his appointment as an agent if his license is suspended. Respondent testified that he will lose his business and his employees will lose their employment.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that Petitioner enter a final order finding Respondent guilty of violating Section 626.621(8), Florida Statutes, as alleged in Count I of the Amended Administrative Complaint, and guilty of violating Section 626.621(11), Florida Statutes, as alleged in Count II of the Amended Administrative Complaint. It is further recommended that Respondent's licensure as an insurance agent be suspended for two months for the violation of Count I and for three months for the violation of Count II, to run concurrently. DONE AND ENTERED this 30th day of June, 2000, in Tallahassee, Leon County, Florida. CLAUDE B. ARRINGTON 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 30th day of June, 2000.
Findings Of Fact Parties Respondent, Department of Insurance (DOI) and Intervenor, Department of Banking and Finance (DBF) are state agencies charged with the regulation of insurance and banking activities, respectively. Great Northern Insured Annuity Corporation (GNA) is an insurance company and agency operating in Florida and elsewhere in space leased in financial institution lobbies, customer service areas and atriums. From its approximately eighty-four locations in Florida it markets annuities, securities and whole life insurance products. Approximately one-third of its 1992 sales of $130 million was in annuities. GNA's principal profits in Florida are derived from its sale of annuities, which it directly underwrites and services. First Nationwide Bank (FNB) leases space in its lobbies and other common areas to insurance agencies and companies, including Vista Financial Group, (Vista). In 1992 Vista sold approximately $13.5 million in annuities from the locations it leases from FNB. First Union Mortgage Corporation (FUMC) is a financial institution with "grandfathered" insurance activities pursuant to section 626.988(5), F.S. It has also been granted a certificate of authority by DOI as a Third Party Administrator pursuant to section 626.88, F.S. Florida Bankers Association (FBA) is a trade association of the banking industry in Florida. It represents its financial institution members. The Association of Banks in Insurance Inc. (ABI) is a trade association of financial institutions and insurance companies. The Florida Association of Life Underwriters (FALU) is a professional association of life, health and direct writer multi-line insurance agents with approximately 8,900 members. James Mitchell and Co. and its subsidiary, JMC Insurance Services Corporation (JMC) are California corporations involved in marketing financial products, including annuities in Florida. Florida Central Credit Union, Railroad and Industrial Federal Credit Union and GTE Federal Credit Union are state or federally chartered credit unions authorized to do business in Florida. Credit Union Services, Inc., a wholly owned subsidiary of GTE Federal Credit Union, sells insurance to credit union members. The Florida Association of Insurance Agents (FAIA) is a trade association representing independent insurance agents in Florida. Barnett Banks Trust Company, N.A. is a trustee for annuities issued by James Mitchell and Company. Barnett Banks Insurance, Inc. is a Florida licensed insurance company providing credit insurance of various types for credit extended by Barnett Banks throughout Florida. BTI Services, Inc. a subsidiary of Barnett, provides records administration services for insurers. Marketing One, Inc., Liberty Securities Corporation and Compulife, Inc. market annuities to existing and prospective customers of financial institutions. Those marketing activities are conducted from lobbies, atriums or other central areas of the premises of the financial institutions. The Financial Institutions Insurance Association is a California non- profit association of financial institutions and insurance companies with members in Florida who lease space to insurance agency tenants. California Federal Bank is a federal savings bank operating branches in the State of Florida and leasing space to a company selling insurance in that space in bank branch offices. The Statute Although other sections of statutes are cited as "law implemented" in proposed Chapter 4-223, its undeniable focus is section 626.988, F.S., as described in the first rule of the proposed chapter: 4-223.001 Purpose. The purpose of these rules is to implement the provisions of Section 626.988, Florida Statutes, and to ensure that customers of financial institutions conduct their business in an atmosphere free from direct or indirect coercion, unfair competition, and unfair or deceptive trade practices, and to implement those statutory provisions which prohibit insurance agents and solicitors who are directly or indirectly associated with, under contract with, or controlled by a financial institution from engaging in insurance agency activities as an employee agent, principal, or agent of a financial institution agency. These rules establish procedures and standards for insurance companies, agencies, agents and solicitors in their relationships and business arrangements with financial institutions. Embodied in Florida's insurance code, a code described as more lengthy than the New Testament, Section 626.988 F.S. enacted in 1974, ". . . generally prohibits banking institutions from engaging in insurance agency activities. . . ." Florida Association of Insurance Agents, Inc. v. Board of Governors, 591 F.2d 334 (U.S. 5th Cir. 1979). The prohibition is accomplished indirectly by forbidding licensed insurance agents or solicitors from engaging in insurance agency activities under certain relationships with financial institutions. There are exceptions to the blanket prohibition, including an amendment in 1990 to permit state chartered banks to sell annuities in the event that federal law permits federal banks to sell annuities. After almost twenty years of attempted enforcement, DOI has described section 626.988, F.S. as "a vague statute with imprecise standards". (Notice of proposed rule, Florida Administrative Weekly, June 26, 1992) The Rules DOI's experience with interpretation and enforcement of Section 626.988, F.S. commenced in earnest in the early 1980's, when insurance companies began to market annuities in the lobbies or public access areas of financial institutions. Many of these companies consulted with the department and obtained guidance as to the applicability of the law to their varied circumstances. In 1985, American Pioneer Life Insurance Company, through its counsel, Edward Kutter, Esquire, inquired of Commissioner Gunter concerning the effect of the law on its operations. American Pioneer Life Insurance Company was a wholly owned subsidiary of American Pioneer Savings Bank. Donald Dowdell, General Counsel of the department, responded by letter dated November 18, 1985. He analyzed the relationships among the insurer, the financial institution, and the insurance agents and determined that there was no significant probability of the financial institution exercising control over the agents: . . . In view of the fact that American Pioneer Savings Bank is the ultimate parent of American Pioneer Life Insurance Company, the specific issue which must be resolved in responding to your inquiry is whether an independent agent appointed by American Pioneer Life is directly or indirectly associated with, or retained, controlled, or employed by American Pioneer Savings Bank. Absent such a relationship, Section 626.988 does not prevent American Pioneer Life and its agents from marketing insurance in this state. . . . These corporate relationships in and of themselves do not create a prohibited relationship between American Pioneer Savings Bank and independent insurance agents appointed by American Pioneer Life. . . . It is recognized that as the corporate parent, American Pioneer Savings Bank may influence or control various corporate activities of its subsidiaries which would not entail control of the solicitation, effectuation and servicing of coverage by insurance agents. If, in fact, American Pioneer Savings Bank does not directly or indirectly control the conduct of insurance activities by American Pioneer Life agents but, instead, the agents sell insurance free of influence from the financial institution, the prohibitions of the statute are inapplicable. (GNA Exhibit No. 8) (emphasis added) Thus, in 1985, the department limited the prohibitions of section 626.988, F.S. to the financial institution's control of, and authority over, an agent's insurance activities. By 1986, other aspects of an association became a concern of the department. Letters responding to inquiries outlined requirements that leased space and insurance sales literature be physically or visually separated from the functions of the financial institution. (GNA Exhibits No. 10, 13 and 16) As a result of the body of opinions being circulated in the form of incipient policy, the department proposed rules implementing section 626.988. These proposed rules were later withdrawn before adoption, but the department continued to use them as guidelines. During this period, DOI received a handful of complaints, mostly from agents. Douglas Shropshire, director of Agent and Agency Services during the relevant period, testified that he could not recall a single consumer complaint with respect to financial institutions engaging in the distribution of insurance products. Gail Connell, identified by Mr. Shropshire as "the Department's person most intimately familiar with field investigation of .988 issues" (Tr. at 760), agreed. (FUMC Exhibit No. 35, at 184-85 See also. FUMC Exhibit No. 36 at 347-50, 353) In 1991, in anticipation of the rule-making mandate of section 120.535, the department reviewed its guidelines. As a part of that review, representatives of the agents' associations, FALU, FAIA and others, were consulted as to the desirability of the rules. In January, 1992, DOI published proposed rules that were substantially similar to the guidelines. Donald Dowdell stated that the proposed rules published at that time represented the department's determination of a reasonable interpretation of the statute, adding, "[T]he line was drawn with the realization of what was happening in the real world today. We could have -- I think the statute prohibits an association, and as I indicated yesterday, if we had wanted to be Draconian about it and make life easier on ourselves, we could have attempted to prohibit any kind of association and see how that would have flown." (FUMC Exhibit No. 36 at 260-261) The rules published in January of 1992 were withdrawn in order to permit the department to correct some perceived inadequacies in the economic impact statement. The rules were presented at a workshop and were republished in June, 1992. The rules were virtually the same as those published in January. A public hearing was held July 12, 1992. On October 6, 1992, DOI published a Notice of Change which materially altered Rules 4-223.003, .004, and .005. According to the Notice of Change, the change was in response to comments received at the public hearing held July 12. More specifically, the amendments were the result of the department's adoption of FALU's position in its petition challenging the June version of the rules. The amendments most significantly provided a definition of "associated" or "associate" and forbade insurance agents from occupying space virtually anywhere within the confines of a financial institution. Mr. Shropshire drafted the amendment to Rules 4-223.003-.005. His source for the definition of "associate" was Webster's Dictionary. Mr. Shropshire testified that the modified proposal resulted from "explosive changes" in the number of banks involved in insurance in this state (Tr. at 793) and information which had come to his knowledge which indicated a need for a more restrictive rule. The two sources of information regarding insurance activities in Florida identified by Mr. Shropshire were the report prepared by investigator Ernest Ulrich in support of the economic impact statement and an ongoing investigation and prosecution of JMC for its marketing of annuities. Both sources predate or were contemporaneous to the June publication of the rules. Mr. Shropshire's reason for the October change was the anticipated difficulty DOI faced in enforcing its rules as originally published. He stated, "So it was getting plain to us that we were going to have to very vigorously and closely and labor-intensively enforce the rule, if it was passed as it was promulgated in June of '92." (tr. at 808) As described by Mr. Shropshire and others, the agency was concerned that insurance activities in financial institutions were not being conducted behind partitions, or even behind planters or other visual separations; and that bank agents were making referrals, taking telephone messages, and setting appointments for insurance agents who covered multiple bank branches on a "circuit-rider" system. Banks leasing space to agents also commonly paid bank employees a bonus for making appointments and referrals of customers to the agents. DOI determined that these leasing arrangements established a strong connection between the bank and the agent, in effect wrapping the insurance program in the bank's colors and presenting it as another bank product. This, to DOI, justified the previously characterized "Draconian" measures. The banks' and other witnesses freely described the economic advantage to a financial institution of having insurance services available at the same location for its customers. Additional amendments to the proposed rules were published in December 1992. Those amendments acknowledge or track the statutory exceptions to the section 626.988(2), F.S. prohibitions. The rules therefore do not apply to mortgage insurance business, credit unions, banks located in cities having a population of less than 5,000, and the sale of annuities when national banks have been authorized to sell such annuities. During the course of the formal hearing, the agency proposed a final change to the rules at issue, clarifying that Chapter 4-223 does not apply to credit life and disability insurance and credit unemployment insurance. (American Banking Insurance Co. Exhibit No. 1) The Economic Impact Dr. Tim Lynch, Director for the Center for Economic Policy Analysis for Florida State University, conducted surveys, collected data and analyzed the economic impact of the June 1992 version of the proposed rules. He prepared the economic impact statement for DOI. Dr. Lynch was consulted by the department about the October changes to the proposed rules and did additional analysis on the impact of the proposed changes. The economic impact statement prepared for the June publication was not amended, but Dr. Lynch's observations are found in his notes, or what he terms a "work in progress". He discussed those observations with department staff and considers the economic impact of prohibiting leases to be at least in the $ millions. The agency did not republish an economic impact statement after the October changes, but plainly considered the impact of those changes as articulated by its consultant, Dr. Lynch. Prohibiting the sale of annuities on bank premises would have a devastating effect on companies engaged in that activity. Banks, also, would be affected, as they recognize a substantial benefit of providing their customers the convenience of an in-house service. Although annuities are defined in Florida law as "life insurance" (See Section 364.602(1), F.S.) they are generally considered investments for future security rather than a cushion against loss. On March 20, 1990, the Office of the Comptroller of the Currency (OCC) issued a formal approval letter stating, among other things, that under controlling Federal banking law, annuities are primarily financial investment instruments that national banks are permitted and authorized to sell. (GNA Exhibit No. 41) A follow-up letter to J. Thomas Caldwell as representative of the Florida Bankers Association specifically concluded that federally chartered banks in Florida were authorized to sell annuities. (GNA Exhibit No. 42) The OCC conclusion with regard to the authority of national banks was upheld in the Variable Annuity Life Insurance Co. v. Robert Clarke, et. al., (VALIC) on November 22, 1991, by the U.S. District Court for the Southern District of Texas, Civil Action No. H-91-1016, 786 F. Supp. 639. The case is pending on appeal before the U.S. Court of Appeals for the Fifth Circuit. (Variable Annuity Life Insurance Company v. Clarke, Case No. 92-2010) In the meantime, the OCC continues to issue opinion letters consistent with its earlier opinion. (See 5/10/93 letter filed as supplemental authority on 6/18/93) National banks are presently selling annuities, and the impact of the October 1992 absolute prohibitions is nullified as to annuity products by the December 1992 amendments addressed in paragraph 30, above.
The Issue The issues to be resolved in this proceeding concern whether the Respondent has violated various provisions of the Florida Insurance Code as alleged in an Amended Order to Show Cause and, if so, what penalty, if any, is warranted.
Findings Of Fact The Petitioner is an agency of the State of Florida charged with licensing and regulating viatical settlement providers in the State of Florida. The Respondent, Future First Financial Group, Inc., is licensed by the State of Florida as a viatical settlement provider. Its President and Chief Executive Officer is Mr. Randy Stelk. A viatical settlement contract involves the sale of a life insurance policy's benefits in exchange for an immediate discounted cash settlement to the original policy holder. A Florida resident "viator" (the insured) desiring to enter into a viatical settlement contract, acts through a Florida licensed broker, who provides the policy information to licensed viatical settlement providers like the Respondent, for subsequent re-sale of policy benefits to purchasers. Future First was initially licensed as a viatical settlement provider on December 26, 1997. The initial regulation of viatical settlement providers in the State of Florida by the Petitioner began at approximately the time Future First initially became licensed. Consolidated findings concerning Counts 1, 3, 4, 6, 7, 12, 15, 16, 20, 22, 28, 29, 34, 35, 36, 38, 39, 41, 43, 44, and 45: Future First was a licensee of and regulated by the Department of Insurance at all times pertinent hereto. The health status representations on the exhibits (referenced in the Department's Proposed Recommended Order) concerning each of these counts, which are the insurance policy applications in question in these counts, are materially inconsistent with the health status representations related to the later viatical settlement agreements contained in the other exhibits so referenced as to each of the above-enumerated counts. These latter exhibits constitute the showing of actual medical condition to the Respondent by the insureds or viators in each transaction referenced in these counts. The overall effect of this showing is to indicate to the Respondent that the viators in question in these counts were HIV positive or had the disease AIDS, along with related diseases and medical conditions, contrary to the representations initially made to the insurance companies issuing the subject policies, in the insurance policy applications referenced in these counts, wherein the viators represented that they suffered from none of the medical diseases or conditions referenced in those application forms, including AIDS. All the exhibits referenced in these counts came from the business files of Future First and were supplied to the Department by Future First upon the Department's request during the investigation process. These material inconsistencies should have caused Future First to be on notice or to know or believe that the viators in question in these counts had made or indeed may have made fraudulent or material misrepresentations on their insurance policy applications. Subsection 626.989(6), Florida Statutes, requires Department licensees to report to the Department any knowledge or belief that a fraudulent insurance practice, as defined in Section 817.234, Florida Statutes, had been or was being committed. Subsection 817.234(3), Florida Statutes, specifically prohibits the presentation of false, incomplete or misleading information in support of an insurance application or the concealing of any fact material to the application. Thus Subsection 817.234(3), supra, specifically prohibits the very act strongly suggested by the evidence presented in the exhibits supportive of the above-referenced counts of the Amended Order. Future First made no reports to the Department concerning these matters until it contends it first became aware of these inconsistencies in health status representations upon receipt of the Order to Show Cause and later the Amended Order to Show Cause. Consolidated Findings of Fact Concerning Counts 2, 5, 8, 9, 10, 11, 13, 14, 17, 18, 19, 23, 24, 27, 30, 31, 32, 33, 40, and 42: The facts established as to these counts are much the same as those referenced above. The health status representations on the insurance policy applications in question and in evidence (exhibit numbers cited in the Proposed Findings as to these counts in the Petitioner's Proposed Recommended Order) are materially inconsistent with the health status representation on the other exhibits which consist generally of the various documents of health or medical information provided to the Respondent by the viators in question, when the transactions leading to the viatical settlement agreements at issue were being entered into and finalized. The commonality among all of these counts as well as the counts in the above Findings of Fact (Part A above) consist of the viator's having been diagnosed with HIV or AIDS and/or related medical conditions sometime in the past prior to executing the insurance policy applications at issue and then responding in the negative on relevant questions on those policy applications, the overall effect of which was to deny the HIV positive test result, the HIV infection and the diagnosis of AIDS and related medical conditions. The viators at issue then openly revealed these conditions and the dates of the relevant diagnoses, all of which pre-dated the insurance policy applications, in the medical status representations they made to the Respondent and which were also revealed in the medical records provided to the Respondent at some point prior to the issuance of the Order to Show Cause and Amended Order. The health status representations made by the viators at these two different, germane points in time are materially inconsistent. Those material inconsistencies reasonably should have caused Future First and its operating officers to be on notice, to know or to believe that the viators made or may have made fraudulent or material misrepresentations on their insurance policy applications. Moreover, the evidence, as to these counts delineated in Part B above, shows that Future First was actually informed specifically that the policies in question had been rescinded by the insurers because the viators had made material misrepresentations on their policy applications. Exhibits such as the Future First policy summary forms show that Future First had been informed of the policy recisions as to the Counts referenced in Part B above. All of the documents constituting the Department's exhibits supportive of these findings, and the policy summary forms included, were found within the business files of Future First and were supplied to the Department by Future First upon its request during the investigative phase of this prosecution. Subsection 626.989(6), Florida Statutes, requires Department licensees to report to the Department any knowledge or belief that a fraudulent insurance practice as defined in Section 817.234, Florida Statutes, had been or was being committed. Subsection 817.234(3), Florida Statutes, specifically prohibits the presentation of false, incomplete or misleading information in support of an insurance application or the concealing of any fact material to the application. Thus, Subsection 817.234(3), supra, specifically prohibits the acts suggested by the documentary evidence presented by the Department, which supports the Findings of Fact herein. Future First made no report on these matters concerning the viators and policies to the Department, prior to the investigatory audit. Additional Findings of Fact Concerning Counts 2, 5, 41, 42, 43, and 44: Concerning Count 2, Exhibits 15 through 17 are viatical settlement purchase agreements entered into between Future First and various viatical settlement purchasers. These agreements represent to those purchasers that the policies, which are the subject of the agreements, are beyond the contestability period (typically two years) during which an insurer company may rescind its policy. The settlement purchase agreements specify that the "contestability period" runs for two years from the date of policy issuance. Exhibit 2 shows, however, that the policy in question was issued on January 22, 1998, and Exhibits 15 through 17, the agreements, were entered into in February, March and April of 1998, well before the January 22, 2000, conclusion of the contestability period. Future First thus had within its possession, in its files, the documents and information to show that the policies were not beyond contestability when the interests in those policies were sold to the investors or viatical settlement purchasers. The purchasers, by initialing the relevant portion of their purchase agreements had indicated and contracted for the purchase of non-contestable policies or policies which had survived the two-year contestable period before being purchased by these investors or viatical settlement purchasers. The vice-president in charge of underwriting, Mr. Sweeney, under the business practices of Future First, essentially made all the calculations and decisions involved in negotiating and effecting the settlement purchase agreements with the investors and the viatical settlement agreements with the original viators or insureds. As an experienced insurance executive and underwriter who had all of the relevant documents available to him, he is chargeable with knowledge that the policies he and Future First were conveying to the settlement purchasers were still within the contestability period, despite his being on documentary notice that the investors had contracted to purchase only non-contestable policies. The officers and directors of the Respondent allowed him to have this independence of action, freedom of conduct and bargaining power on behalf of Future First and therefore, Future First, the corporation, is chargeable with the conduct it allowed him to engage in, even assuming, arguendo, that no other officer, director or employee of the company knew of the relevant details of these transactions. Thus Future First misrepresented to its investors that the policies were beyond contestability when in fact they were not. It thus is chargeable with knowingly selling interests in contestable policies to investors, who had specifically contracted for the purchase for non-contestable policies. This misrepresentation was material to the purchases because the insurers' ability to rescind the policies during contestability, thereby destroying the very instrument securing the purchasers' investment, was not made known to those purchasers. The potential destruction of that instrument and the consequent loss of the investment to the purchaser is material to any reasoned decision to invest. CEO Randy Stelk's testimony at hearing to the effect that computer input error had caused contestable policies to be inadvertently sold to purchasers who contractually specified a non-contestable policy is rebutted by Future First's own documents from its records which correctly and explicitly identify the policy as contestable. See Exhibits 11a and 11f, at pages 1 and 4, and Exhibit 24, all of which correctly identify the policy as contestable. Exhibit 24 specifically notes the dates at which the policy was projected to emerge from its contestability period. Thus this documented evidence, together with the evidence of Mr. Sweeney's close and direct involvement with arranging for the transactions and making decisions as to which policies to sell to which investors belies Mr. Stelk's testimony in this regard. Concerning Count 5, Exhibits 50, 54, 55, 56 and 57, are viatical settlement purchase agreements which inter alia represented to the respective viatical settlement purchasers that the policy in question was beyond the contestability period during which an insurer may rescind the policy. The "contestability period" runs for two years from the date of policy issuance. However, Exhibit 39, shows that the policy in question was issued on February 3, 1998, and Exhibits 50, 54, 55, 56 and 57, were respectively entered into in February of 1998, well prior to the February 3, 2000, end of the contestability period. Here again, Future First's own records, which correctly and explicitly identify this policy as contestable also specifically note, at Exhibits 42d and 46, the date at which the policy was projected to emerge from the contestability period. The purchase agreements referenced above clearly show that the investors contemplated and contracted to purchase a non-contestable policy. These documents clearly were available to Mr. Sweeney and to Future First at the time Mr. Sweeney was making the underwriting decisions and entering into the agreements with the investors, and consequently this knowledge is chargeable to him and to Future First. Again Mr. Stelks' testimony that computer input error had caused inadvertent sale of contestable policies to purchasers who had contractually specified non-contestable policies is rebutted by Future First's own records, the evidence concerning Future First business practices and specifically Mr. Sweeney's underwriting methods and conduct. Thus, Mr. Stelk's testimony in this regard is not credited. Thus, it is inferred that Future First, through Mr. Sweeney, knowingly represented to investors that the policies were beyond contestability when they were not and such a representation was material to the purchase because the insurers' ability to rescind a policy during contestability and destroy the very instrument securing the investment was not made known to the purchaser. The potential destruction of that instrument and the consequent loss of investment is material to any reasoned decision to invest. Concerning Count 41, the fifth page of Exhibit 428, contains a paragraph entitled "Incontestability" which establishes that the life insurance policy in question was subject to a two-year contestability period, during which the insurer could rescind the policy. Exhibits 446, 447, 448, 449, 450 and 451, are all viatical settlement purchase agreements through which the viatical settlement investors purchased an interest in the death benefit of the life insurance policy in question. Each of those purchase agreements contains a standard section entitled "Minimum Criteria" which is initialed by the purchaser, thereby indicating the purchaser's decision to purchase an interest only in a policy which was beyond contestability. Future First nonetheless placed all of those investors' monies into the policy in question (See Exhibit 428) while it was still within the two-year contestability period without informing the purchasers of that fact. Future First had the policy in its possession and necessarily had to have a copy of it in possession in order to purchase the policy from the viator, which it did in July of 1998. It thus knew the policy was still within its contestability period when interest in it were sold to the purchasers in question. The same reasons found with regard to Counts 2 and 5 prevail here with regard to Mr. Sweeney's involvement. The documents were in Future First's possession and within its knowledge such that the circumstantial evidence clearly shows that Future First is chargeable with knowledge or belief that it sold contestable policies to investors who had no reason to believe they were purchasing contestable policies. Concerning Count 42, Exhibit 453 is dated March 24, 1998, and is a viatical settlement purchase agreement between Future First and the viatical settlement purchaser named therein. The agreement contains the same initialed provision found with regard to the agreements in Counts 2, 5 and 41, indicating the purchasers' decision to invest only in a policy which was beyond the two-year contestability period. The agreement bears the designation "PRA 58075" in the lower left hand corner of the first page (purchaser number). Exhibit 459 is a letter dated May 21, 1998, authorizing Charles R. Sussman, Trustee for the Fidelity Trust (identified in numerous exhibits, including 454 in this count, as the escrow agent used by Future First for viatical settlement contract transactions), to wire funds from that trust to Compass Bank for the purchase of an interest in the death benefits of the Farmers New World Life Insurance policy on the viator named therein, which purchase was accomplished through the execution of Exhibit 454 on June 6, 1998. Among the PRA numbers identified in Exhibit 459, is 58075, corresponding to Exhibit 453, the above-referenced purchase contract. Exhibit 455 is an internally prepared Future First document that clearly states that the life insurance policy in question was still well within its contestability period on May 21, 1998. The exhibits thus establish that Future First represented to the investor that the policy it would purchase with his funds was beyond contestability when, because of the unequivocal documents in its possession, Future First had to have known, through Mr. Sweeney, that it was not. Indeed all of those exhibits were found within the business files of Future First and Future First stipulated that included in those exhibits are its purchase request agreements that contain the contestability provision in question. Exhibits 462 and 463 establish that the Manhattan National Life Insurance policy referenced in those exhibits was issued on March 28, 1998. Exhibit 465, establishes that the Manhattan National Life Insurance policy was purchased by Future First on June 22, 1998. Exhibit 468, establishes that on July 1, 1998, purchaser 58075's funds were used to purchase an interest in that Manhattan National Life Insurance policy obviously well within the two-year contestability period since the policy was only issued on March 28, 1998. This was despite an express representation otherwise in the viatical settlement purchase agreement. Exhibits 471 and 472, show that the Manhattan National Life Insurance policy was rescinded during the contestability period in September 1998. Exhibit 473 establishes that Future First decided to switch the viatical settlement purchaser's funds out of the Manhattan National Life Insurance policy into a John Hancock Life Insurance Company policy. However, it did not inform the purchaser that the Manhattan National Life Insurance policy had been rescinded during its contestability period. Exhibits 485 and 486, establish that the Lincoln Benefit Life Insurance policy referenced therein was issued on January 23, 1998. Exhibit 487 establishes that the Lincoln Benefit Life Insurance policy was purchased by Future First in November of 1998, using the purchaser's funds referenced in Exhibits 488 and 489. Among those purchaser's funds were those of Purchaser 58075. Thus, Purchaser 58075's monies were used to purchase an interest in the death benefit of the Lincoln Benefit Life Insurance policy in question. Despite the "beyond contestability" representation made in the viatical settlement purchase agreement between Purchaser 58075 and Future First, Future First placed that purchaser's money into the Lincoln Benefit Life Insurance policy while it was still in its contestability period. Future First's own records refute Mr. Stelk's testimony that computer input error caused inadvertent sales of contestable policies to purchasers who had specified, contractually, their desire for non-contestable policies. The documents from Future First's own records in evidence, explicitly identify this policy as contestable and that the purchasers involved had desired non- contestable policies. In light of the foregoing reasons found as fact as to Counts 2, 5 and 41, which are adopted as to Count 42, Future First is chargeable with knowledge that it was selling contestable policies to purchasers who had specified contractually their wish and intent to purchase non-contestable policies. Count 43 involves the sale by Future First of interests in the death benefits of J.C. Penny Life Insurance Company Policy No. 25184/74L40L3762 in January of 1998, to three different viatical settlement purchasers. This is evidenced by Exhibits 498, 499 and 500, the respective settlement purchase agreements. Each of those purchase agreements includes a provision that required the purchase of an interest only in a policy which was beyond contestability. Exhibits 494, 496, 498, 499 and 500, together however, show that the interest in the policy sold to those purchasers were sold while the policy was still contestable, without informing the purchasers. All of these exhibits came from the business files or records of Future First and Future First stipulated that included in those exhibits are the purchase request agreements that contain the provisions restricting purchases to policies which were beyond the two-year contestability period. In light of the findings made as to Counts 2, 5, 41 and 42, next above, it is determined that Future First, the Respondent, is charged with knowledge that it, and specifically its vice-president in charge of underwriting, Mr. Sweeney, sold those policies which were still contestable to the relevant purchasers; that those purchasers had specified in their purchase agreements their intent to purchase only policies which were uncontestable and that it had not so informed those purchasers. Count 44, concerns a viatical settlement purchase agreement entered into by Future First on March 24, 1998, relating to the sale and purchase of an interest in the death benefit of an insurance policy. See Exhibit 510, in evidence. That agreement represented to the purchaser that the interest to be purchased was to be from a policy which was beyond the two- year contestability period. See Exhibits 508 and 510. However, the policy selected for investment for that purchaser by Future First was not beyond contestability. Exhibit 506, obtained from Future First's own files, clearly shows that the issuance date of the policy was May 6, 1998, and Exhibits 504, 508 and 510 considered together, indicate that the policy was sold to that purchaser while it was still contestable. Future First thus subjected the purchaser's investment to the undisclosed risk of rescission of the policy. The existence of such a risk would certainly be material to that investor's decision about whether to so invest. Thus by investing the purchaser's funds in a contestable policy instead of an uncontestable policy, without advising that investor of such a deviation from their contractual agreement, is, in effect, a material misrepresentation in that transaction. For the reasons found as to Counts 2, 5, 41, 42 and 43 above, Future First is chargeable with knowledge that the policy was contestable and that it had invested the purchaser's funds in a contestable policy when it was contractually bound to only invest that purchaser's funds in an uncontestable policy, as established by the terms of the viatical settlement purchase agreement. Future First's business practices. Future First conducts its business in various states through representatives resident in such states known as viatical settlement brokers. Viatical settlement brokers gather all relevant information, including available medical information and usually provide it to various viatical settlement providers in order to solicit multiple bids on a particular policy. Future First does not solicit viators itself. During the time period relevant to the allegation in the Amended Order, when Future First initially received a package from a broker, it was divided into its insurance and medical components. The insurance component was provided to Mr. William Sweeney, Future First's Vice-President of Underwriting. The medical component was provided to a nurse on the staff with Future First for initial medical review and then forwarded to Future First's independent medical consultant, Dr. Michael Duffy. During the time period relevant to the Amended Order, Future First offered a one, two or three-year viatical purchase program. That is, viators must have a certified life expectancy of one, two or three years in order to qualify with Future First. After Dr. Duffy reviewed a particular file and the viator was deemed qualified as to one of the three available programs, Dr. Duffy would certify and assign a life expectancy to the viator and return the file to Mr. Sweeney. Life expectancy estimates are inherently subject to many variables, are unpredictable and constitute a risk to the purchaser. Mr. Sweeney's responsibilities included verification that the insurance information provided with any particular file was correct and complete (including insurance policy applications), that the policy actually existed and was in force, that premiums were paid up to date, that the insurance company had the appropriate rating, as well as conducting other verifications. Before a policy was approved for purchase, it was Mr. Sweeney's ultimate responsibility, pursuant to Future First's existing corporate policy, to compare the date of initial diagnosis of a potential viator's medical condition to the insurance policy application to look for any inconsistencies. Mr. Sweeney next completed a "file summary cover sheet" referencing certain information and verifications and attached it to the file. Mr. Sweeney was essentially a "one-man operation" in exclusive control of Future First's underwriting department and was ultimately responsible for deciding whether or not Future First would offer to bid on a particular policy. Future First's business operations in effect at the time relevant to the Amended Order were so compartmentalized that other officers or employees at Future First might not know any details associated with Mr. Sweeney's activities. After Mr. Sweeney authorized Future First to bid on a particular policy, the file was transferred to the bidding department. The bidding department did not re-visit or otherwise question Mr. Sweeney's decision to bid on a particular policy, but only reviewed the cover sheet to establish a bid price. If documentation was missing from any file, it was Mr. Sweeney's responsibility to contact the broker to request the missing documents. All viatical settlement brokers with whom Future First did business in Florida were required to be licensed by the Petitioner. Future First currently no longer conducts business with the broker "Funds For Life" because that particular broker dealt solely in "contestable" policies and Future First no longer purchases such policies, at least since the Petitioner's audit. Future First no longer has a business relationship with the Texas-based broker "Southwest Viatical," in part because Southwest Viatical routinely failed to provide complete documentation to Future First, including the insurance applications of viators. Southwest Viatical was specifically requested to provide insurance policy applications regarding the relevant policies referred to in the Amended Order but refused to do so. Most of the Southwest Viatical files purchased by Future First did not include insurance applications at the time of purchase. The insurance applications were ultimately obtained by Future First, however, at some point prior to the 1999 audit by the Petitioner. Future First became concerned about the character of individuals associated with Southwest Viatical and when requested by Southwest Viatical to forward commission funds to an offshore account, Future First declined to do so and immediately ceased doing business with Southwest Viatical. Future First cooperated thoroughly with Texas authorities in their investigation of Southwest Viatical, ultimately culminating, as a direct result of Future First's assistance, with the apprehension and subsequent incarceration of two principals of Southwest Viatical. During the period of time alleged in the Amended Order Future First received, on the average, between 400 and 600 policies per month from brokers requesting a bid. Future First rejected and never bid on the majority of policies referred to it by Southwest Viatical. On the average, Future First ultimately purchased approximately 25 percent of the policies submitted to it for a bid. Mr. Sweeney was primarily responsible for communicating with brokers as to all aspects of a potential viatical settlement transaction and to request all required documentation, including insurance policy applications. During the course of Mr. Stelk's affiliation with Future First he personally became familiar with the handwriting of William F. Sweeney. It is Mr. Sweeney's initials which appear on the cover sheets entered into evidence by the Petitioner, exemplified by Petitioner's Exhibit 4a. All the remaining "cover sheet" exhibits of the Petitioner contain the initials "WFS" on the top right hand corner which are Mr. Sweeney's initials. Mr. Sweeney is not currently an officer, director or employee of Future First because he was removed from any position with the Respondent corporation by order of the Petitioner. No other officers, directors or employees of the Respondent have been subject to a similar removal order, nor has Future First itself. The criminal proceedings currently pending against the Respondent are the direct result of Mr. Sweeney's activities while employed by Future First. The Petitioner's lead investigator reviewing Future First's business activities recommended that individual charges only be brought against Mr. Sweeney and against no other individual employed by or affiliated with the Respondent. Future First has a business relationship with licensed life insurance agents and/or securities brokers throughout the United States to solicit funds from individuals for ultimate purchase of viatical settlements. Those licensed individuals present an approved Purchase Request Agreement (PRA) to a potential purchaser to discuss the various Future First programs available and to help the purchaser finalize a PRA. Depending on what state the purchaser resided in, the purchaser would then issue a check either to Future First directly or to the Fidelity Trust (Future First's escrow agent), to be held until such time as Future First could purchase from a viator a policy matching the program desired by that purchaser. Thereafter, a formal "closing" would occur when the purchaser was, where appropriate, made a beneficiary on one or more insurance policies; all verifications and notifications to the insurance company and other entities were completed; an attorney and the trustee, would approve all aspects of the transaction within their purview, and a copy of the closing package would be sent to the purchaser for his or her records. After the closing, Future First would engage Life Watch Services, Inc., an unaffiliated company, to monitor the health status of the viator on a monthly basis in order that all appropriate actions may be taken at the time of the viator's death, so that the policy benefits may be promptly paid to the purchaser. Future First initially engaged in the purchase of contestable policies only after being approached by groups of agents with potential purchasers willing to assume the risk associated with contestable policies. Understanding the risk associated with such policies, Future First reserved 20 percent of its potential profit from such transactions and placed those funds in trust in a "Guaranty Fund" in the event that an insurance company rescinded a policy within the contestable period. In the event an insurer rescinded a contestable policy, Future First purchased a new policy for its customer out of the Guaranty Fund, at no additional cost to the customer. No purchaser ever lost any "investment time" if a policy was rescinded by an insurance company because that purchaser would be provided a new policy involving a viator with the same ultimate remaining life expectancy. Thus, without any prompting by a governmental authority, Future First made the business decision to voluntarily exceed the protections of Florida law by establishing the Guaranty Fund in order to purchase replacement policies for its customers if the initial policy was rescinded by the insurer. The Guaranty Fund was also utilized to make the purchaser whole even when an insurance company cancelled or non- renewed an insurance policy on an entire group, or if a new insurance carrier for a particular group later reduced the benefit level assigned to the purchaser. The Guaranty Fund was also used for the benefit of purchasers if a viator as a member of an employer group, quit his or her job and the viator exercised a statutory right to have the group policy benefits converted to an individual policy. Because benefit levels on such individual policies are typically lower, the Guaranty Fund was used to purchase additional insurance benefits to assign to the purchaser. Additionally, if a policy lapsed for any reason, the Guaranty Fund was used to procure a new policy or policies in order that the purchaser would be fully protected according to the terms of the PRA. No policy purchased by Future First has ever lapsed for failure of Future First to pay the premium. Funds from the Guaranty Fund have been used to purchase new policies when a viator committed suicide and the insurance company later rescinded the policy, as well. The Guaranty Fund maintained by Future First existed to cover other contingencies beyond just the possible recession of insurance policies because of the misrepresentation of the viator discovered by the insurer within the contestable period. Future First, through use of the Guaranty Fund, has replaced approximately 17 million dollars in face value of insurance policies, equating to about 12.4 million dollars in direct cost to Future First and, as a result, no Future First purchaser has ever been harmed. The 12.4 million dollars used to purchase replacement policies would otherwise have been retained by Future First as profit. Today Future First does not purchase contestable policies in the regular course of its business. The only exception to that occurs when an insured group undergoes a carrier change and a new contestable period is automatically instituted by the new carrier. There is no prohibition in Florida either presently or during the times relevant to the Amended Order, against the purchase of contestable policies by a viatical settlement provider. The recission of the contestable policies at issue in fact immediately followed an inquiry from the Department of Insurance to the insurers, which alerted them that the Department suspected fraud in the inception of the policies. That is, it suspected fraud on the part of the viators or insureds on those policies, not Future First. Future First immediately utilized the Guaranty Fund and began replacing the policies. None of the rescinding insurers have accused Future First of any complicity in any alleged fraud with respect to the policies referenced in the Amended Order, nor has the Department of Insurance alleged any such fraud against Future First. All but one or two of the rescinded policies have been replaced and the purchasers made whole, pursuant to the terms of their original PRA. One of the two policies not fully replaced as of the date of the hearing was being contested by Future First as to the legality of the insurance company's rescission, and Future First will replace the policy, if needed, at such time as that legal issue is resolved. Of all the policies at issue in the Amended Order, including, as well, any replacement policy subsequently purchased by Future First with money from the Guaranty Fund, only one or two contestable periods had not expired as of the date of the hearing. Those contestable periods were to expire thirty to sixty days after the date of the final hearing in this matter. Future First regularly monitors and verifies the status of all policies assigned to its purchasers, including the status of all replacement policies. The direct costs to Future First to purchase replacement policies for the rescinded policies referenced in the amended order was approximately $1.5 million dollars paid out of the Guaranty Fund. Since its initial licensure in the State of Florida, Future First has cooperated with the Petitioner concerning pending legislation, rule development and other contacts with the Petitioner agency. It has cooperated fully with the Petitioner when the audit of Future First occurred in February of 1999, provided all requested information and documentation and made all personnel available to confer with examiners in a full and frank manner. In the course of the four-week on-site audit, Mr. Stelk personally met with the Petitioner's examiners once or twice a week to discuss the Petitioner's suggestions for improving compliance. The Petitioner issued a draft "Report of Examination" as a result of its audit on August 5, 1999. It contained suggestions, comments and recommendations which had been discussed during Future First's staff meetings with the examiners. Future First addressed many of the Petitioner's concerns raised in the Report of Examination (report) and implemented certain suggested changes in its business practices. Mr. Stelk directed that a formal response to the report be filed, addressing the specific points raised by the Petitioner and explaining any corrective action taken where applicable. Future First viewed certain of the findings and suggestions made at the earlier meetings and later contained in the draft report as potentially helpful to its business. It therefore implemented those suggestions even before receiving the draft of the report. Certain suggestions in the report of such as a request to formalize a refund policy, were not strictly required by a controlling statute. However, Future First nonetheless voluntarily implemented such a refund policy. Future First has cooperated with all governmental agencies interested in reviewing its files at all times during the course of its licensure as a viatical settlement provider and during the course of the relevant investigations. There has been no allegation or suggestion that it has in any way altered any documents, tampered with its files or that any information was purposely missing. The Respondent contends that the Petitioner had no knowledge as to when any particular documents were received into Future First's files, including insurance applications, medical diagnosis information or other documents and has conceded that some policy applications or medical documentations may not have been received until after the bid process and viatical transactions in some cases were actually closed. Thus, Future First would not have been able to compare documents to detect possible fraud as to those situations. Therefore, Future First could not have been guilty of fraud or misrepresentation to its purchasers as to such transactions and files if it had no documentation at the point of the transaction being closed to indicate to it that possible insurance fraud in the inducement, by a viator, had occurred. In point of fact the Petitioner is not accusing Future First of fraud. However, as of the time of the audit in February 1999, because of the discussions and information it received at meetings with Department agents and employees, and certainly as to formal notification on August 5, 1999 in the Department's report, the Respondent knew that many insurance applications in its files had medical diagnosis information or disclosures by viators which were at odds with the medical information it obtained in the viatical settlement and contracting process. It still failed to report that knowledge (and indeed circumstantial evidence clearly indicates that at least Mr. Sweeney had that knowledge even before the February 1999 audit, as to many of the files). Future First still did not report potential fraud on the part of viators to the Department that it obviously had knowledge of until it began to actually report it in a formal way, after the first Show Cause Order was served (January 2000). It is also clear that the Department knew about this inconsistent medical information and probable insurance fraud by the time of its February 1999 audit. In November of 2000, as part of its efforts to cooperate with the requirements of the Department and the relevant statutes and rules, Future First filed an Anti-Fraud Education and Training Plan (Plan) with the Department, Division of Insurance Fraud. Neither Future First nor any of its representatives received any notice from the Department that the Plan was in any way deficient or otherwise non-compliant with Florida law. It has implemented that Plan and adherence to it has had a positive effect on Future First's business. The Anti-Fraud Plan stresses that Future First will not bid on a policy for purposes of viatical settlement unless the viator's insurance application is present in the file at or before the time of the bid. Future First's corporate policy, even prior to the implementation of the Anti-Fraud Plan has been that the insurance application must be reviewed and compared with available medical documentation for any inconsistencies prior to bidding on a policy. It is also apparent, however, that Mr. Sweeney and those under his direction and control apparently did not do so in many cases. During the course of the investigation, the "free- form" stage of this proceeding and the formal stage of this proceeding, Future First has made numerous form and other filings with the Petitioner seeking approval in connection with a new PRA and various other purchaser disclosures required by recent amendments to Florida Statutes. After comments and questions from the Department, resulting in some revisions to such documents, the new PRA and disclosure documents were approved by the Department, approval of the last document being obtained in April 2001. The Respondent, by its involvement through Mr. Stelk with the Viatical Life Settlement Association of American and the National Association of Insurance Commissioners, has made a bonafide effort to gain knowledge of specific, appropriate business practices of other viatical settlement providers doing business in the United States as well as in Florida. Unlike certain other viatical settlement providers operating in Florida and elsewhere, Future First has never made premium payments on insurance policies out of the personal checking accounts of officers, directors or employees, has never instructed viators not to contact insurance companies and has never required viators to sign undated, change-of-ownership forms for filing with the insurer after the contestability period expired for any reason whatever, including as part of an effort to conceal from an insurance company the fact that an insurance policy was subject to viatical settlement. No such activity or effort to conceal has been alleged. (Compare, Accelerated Benefits Corporation documents in evidence pursuant to the Petitioner's Motion for Official Recognition). On March 19, 2000, February 8, 2001, and March 6, 2001, Future First filed with the Department identifying information and documents pursuant to the requirements of Subsection 626.989(6), Florida Statutes, to the effect that fraud may have been involved in the procurement of all of the rescinded insurance policies referenced in the Show Cause Order and the Amended Order. The three separate fraud notifications constitute the Respondent's Exhibits 7, 8 and 9 and correspond to the time period shortly after service of the initial Show Cause Order and the Amended Show Cause Order.
