08-005624 Dallas National Insurance Company vs. Office Of Insurance Regulation Status: Closed Recommended Order on Wednesday, February 3, 2010.

Summary: A case of first impression as to Florida's insurance "fronting" prohibition. Explores the interrelationship of carriers, PEOs, and third party administrators.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DALLAS NATIONAL INSURANCE )

COMPANY, )

)

Petitioner, )

)

vs. ) Case No. 08-5624

)

OFFICE OF INSURANCE REGULATION, )

)

Respondent. )

)

RECOMMENDED ORDER

Upon due notice, a disputed-fact hearing was held in this

case August 10, through 14, August 31, and September 1, 2009, in

Tallahassee, Florida, before Ella Jane P. Davis, a duly-assigned

Administrative Law Judge of the Division of Administrative

Hearings.

APPEARANCES

For Petitioner: J. Riley Davis, Esquire

Edward L. Kutter, Esquire

Akerman Senterfitt, P.A.

106 East College Avenue, Suite 1200

Tallahassee, Florida 32301

For Respondent: Elenita Gomez, Esquire

Amanda Allen, Esquire

Office of Insurance Regulation

200 East Gaines Street, Room 612

Tallahassee, Florida 32399

STATEMENT OF THE ISSUE

Whether, upon proof of eligibility, pursuant to Sections

624.401 and 624.404, Florida Statutes, Petitioner may be granted

a Certificate of Authority to transact business as a property

and casualty insurer in the State of Florida.

PRELIMINARY STATEMENT

Petitioner was denied a certificate of authority by a

letter dated September 17, 2008.

The reasons given in the September 17, 2008, letter of

denial all hinge on past methods of dealing by Petitioner

corporation, its predecessors and affiliates, and Charles David

Wood. It reads, in pertinent part, as follows:

1. [After quoting Section 624.404(3)(a)]

The Office has not found sufficient evidence

in any documentation provided by your client

with this application, in its past

submission, or at the evidentiary hearing

held at the Office on September 20, 2006

that Dallas National’s sole owner and

Chairman of the Board, Charles David Wood,

Jr., is consistently competent and

trustworthy. Further, not only does Charles

David Wood, Jr. have a pattern of behavior

which the Office finds untrustworthy, but

there is “good reason to believe” he has

acted in bad faith.

By virtue of his sole ownership and position

as Chairman of the Board, Charles David

Wood, Jr. is the ultimate controlling person

of Dallas National and maintains control

over the affairs of Dallas National and its

affiliates. His history and pattern of

behavior contradicts regulatory compliance

and trustworthiness, and the basis of our

finding includes, but is not limited to the

following:

a.

* * *

Pursuant to audits performed by the Florida

Division of Workers Compensation, Aspen

Administrators, Inc. continues to not meet

the statutory requirements for the timely

payment of claims, causing the carrier to be

in violation of Section 440.20(8)(b),

Florida Statutes. This pattern of

unsatisfactory performance in the day-to-day

operational matters is a hazardous practice

that is harmful to injured workers in this

state.

Pursuant to a recent audit performed by the

Florida Division of Workers’ Compensation,

AMS Staff Leasing admitted that it failed to

report claims to its insurer and that the

claims were handled by AMS Staff Leasing,

not Aspen Administrators, Inc., the

contracted claims adjuster. The failure of

the employer (AMS Staff Leasing) to report

to the insurer is a direct violation of

Section 440.185(2), Florida Statutes, and

the claims adjusting activity of AMS Staff

Leasing without holding a license is a

violation of Section 626.8696, Florida

Statutes. Further, such activity by these

entities that are controlled by Charles

David Wood, Jr. results in skewed data for

the purpose of rate making and may result in

inadequate rates and inappropriate filings,

pursuant to Section 627.091, Florida

Statutes.

b. The management of Dallas National, and

in particular, Charles David Wood, Jr.,

continues to operate in circumvention of

state regulatory laws wherever contradictory

with or inconvenient to its own business

practices and objectives.

AMS Staff Leasing is presently insured in

Florida by Companion Property and Casualty

Insurance company (“Companion”), which is

domiciled in South Carolina and licensed in

Florida. One hundred percent (100%) of the

AMS Staff Leasing workers’ compensation

business written by Companion is ceded back

to Dallas National as reinsurer. This is a

“fronting” transaction, in violation of

Section 624.404(4), Florida Statutes, and is

intended to circumvent Florida law requiring

Dallas National to hold a valid Certificate

of Authority to transact business in this

state. This activity is a violation of

Florida Statutes and is a representative

example of how the Office perceives that

Charles David Wood, Jr. and Dallas National

continue to conduct business affairs.

Several other such examples were cited in

the Office’s letter dated December 1, 2006,

which are further incorporated by reference

herein.

c. Documentation has been given to the

Office by other regulatory agencies of the

examinations of claims and underwriting

practices by Dallas National and/or its

affiliated third-party administrator, Aspen

Administrators, Inc., which have continually

produced unsatisfactory performance results.

. . .

d. While the Office acknowledges that

Dallas National has shown that it appears to

be in good financial standing at this time,

it is rather the management decision-making

practices that are of utmost concern to the

Office.

* * *

2. The Office finds it necessary to restate

from item number 1 of the Office’s letter

dated December 1, 2006, and do so for

purpose of the conclusion reached in the

paragraph that follows:

“Dallas National is a member of an insurance

holding company system that is focused on a

business model centered on personnel

staffing related services, particularly

staff leasing and professional employer

organizations (“PEO”). The business

relationships between Dallas National and

the affiliated PEOs it insures are deemed by

the Office to not be at “arms length,” to

the detriment of Dallas National. There is

an insufficient “firewall” between Dallas

National, as insurer, and the affiliated PEO

it insures. For example, Dallas National

relies upon the PEO to perform certain

underwriting, coding, loss control, auditing

and other functions that should be performed

and/or verified by the insurer. This lack

of control is a material weakness in Dallas

National’s business plan and is a hazardous

business practice that could leave injured

workers without full compensation for their

injuries. Because the workers compensation

line of business is ‘long-tailed’ by nature,

the full effects of this lack of control may

not be realized for decades and could very

well leave the insurer with insufficient

assets to satisfy all of its obligations to

injured workers. In a truly arms-length

transaction, it would be expected that the

PEO would perform most of these functions on

its own, but that the insurer would also

maintain these controls in a redundant

manner.”

* * *

The management of Dallas National has made

material misrepresentations in its

presentation and response to critical items

that lie at the heart of the issues raised

by the Office, leading the Office back to

Section 624.404(3)(a). (Bracketed material

supplied)

Petitioner timely requested a disputed-fact hearing.

On November 10, 2008, the cause was referred to the

Division of Administrative Hearings. The file of the Division

reflects all pleadings and Division notices and orders.

At final hearing, Petitioner presented the oral testimony

of Chris Nehls, Laura Wehrle, James Pickens, Charles David Wood,

Jr., William Reid, Ray Neff, and Robert Meyer, and had 12

exhibits admitted in evidence.

Respondent presented the oral testimony of Alison Barber,

Susan Bernard, Stephen Yon, Robin Westcott, Steve Szypula,

Joseph Boor, and Belinda Miller, and had nine exhibits admitted

in evidence. Three additional exhibits were proffered.

Five joint exhibits were also admitted in evidence.

The exhibits contain multiple pages and sub-parts.

An eleven-volume Transcript, totaling 1525 pages, was filed

on September 22, 2009.

Each party timely-filed its respective Proposed Recommended

Order on November 5, 2009, as provided for by the stipulated

extended timeframe and appropriate Order.

FINDINGS OF FACT

1. Petitioner Dallas National Insurance Company (Dallas

National) is a Stock Insurance Company, domiciled in Texas, with

headquarters in Dallas, Texas. It writes predominantly small

business liability insurance and workers’ compensation

insurance, both of which fall in the property and casualty

classification of insurance, generally.

2. Respondent Office of Insurance Regulation (OIR) is the

State Agency responsible for licensing and regulating insurance

in Florida. Absent a Florida license, Petitioner Dallas

National cannot legally write or sell insurance in this state.

3. Dallas National is a successor in interest to Dallas

Fire Insurance Company (Dallas Fire) and California Indemnity

Insurance Company (California Indemnity).

4. California Indemnity was previously licensed to do

business in Florida. Its license to do business in Florida was

revoked by OIR in 2006, while Dallas Fire and California

Indemnity were transitioning into Dallas National, as more fully

described infra .

5. In 2006, Petitioner Dallas National filed an

application for a certificate of authority as a foreign property

and casualty insurer to write lines of workers' compensation and

employer’s liability insurance in Florida. That application was

denied on December 1, 2006. Petitioner reapplied for a Florida

license in 2008, and was denied by a letter from Respondent,

dated September 17, 2008. It is this letter and present

application and denial that are at issue herein. The

September 17, 2008, denial letter incorporated parts of the

earlier December 1, 2006, denial letter. ( See Preliminary

Statement).

6. Dallas Fire was a property and casualty insurer

authorized to do business in Texas and Oklahoma, which was

acquired by Charles David Wood in July 2002.

7. In December 2003, Dallas Fire, by consent of Mr. Wood

and its Board of Directors, was placed under administrative

supervision by the Texas Office of Insurance Regulation. By

mutual agreement, the Texas regulatory agency’s oversight was

not made public, and Mr. Wood continued to manage the company

through his own staff, while taking instruction and advice from

the Texas regulator. Texas lifted its oversight after

approximately 19 months. During this period of time, and for

years before and after, Betty Patterson was a Texas Deputy

Commissioner of Insurance.

8. At about the same time in 2002, that Mr. Wood accepted

Texas’ regulatory oversight, a search was conducted and

Chris Nehls was ultimately selected as a replacement corporate

president for the company that ultimately became Dallas

National.

9. Mr. Nehls continues as president of Dallas National and

has final responsibility for all operations, underwritings,

claims handling, profits and losses, accounting and finance, and

any of the operation and technical functions within the company.

He had oversight of Dallas National’s successive license

applications to OIR in 2006 and 2008.

10. In 2005-2006, Mr. Wood, with approval by the Texas and

California insurance regulatory agencies, acquired California

Indemnity, a property and casualty insurer licensed in the State

of California and 30 other states.

11. When purchased, California Indemnity had a number of

old regulatory actions pending against it by California’s

Department of Insurance. California’s insurance regulator’s

agreement/acquiescense in Mr. Wood’s purchase of California

Indemnity was conditioned on (1) Mr. Wood ’ s transferring

California Indemnity to Texas, where it would be merged with

Dallas Fire to become Dallas National; (2) Dallas National’s

removing the word “California” from its corporate name by

December 31, 2005; and (3) the re-domesticated company’s not

writing any insurance in California until California’s insurance

regulatory agency approved. This agreement has kept Dallas

National under California regulatory scrutiny since that time.

Dallas National continues to invite California to inspect its

offices, its books, and its business activities, but Dallas

National has yet to formally petition for a license in

California. 1/

12. On January 2, 2006, effective December 31, 2005, the

merger of Dallas Fire and California Indemnity into Dallas

National Insurance Company was approved by the Texas Department

of Insurance. This effected the name change in a timely manner

under Dallas National’s agreement with California.

13. However, Dallas National did not fulfill the letter of

its agreement with the California regulator, because the

paperwork for finally divesting itself of the word “California”

was not completed and filed with California until September 12,

2007. California has neither prosecuted nor fined Dallas

National for this delay, and despite a 2003, California

violation by Dallas Fire, continues to be willing to work with

Dallas National towards California licensure. ( Cf. Findings of

Fact 66-70).

14. At the present time, Dallas National is licensed as a

property and casualty insurer in 39 states and the District of

Columbia.

15. Respondent correctly points out that because Dallas

National acquired approximately 30 states’ licenses at the same

time it re-domesticated California Indemnity and renamed Dallas

Fire, Dallas National and Mr. Wood have not proven themselves in

the same way as if Dallas National had acquired 30 new licenses

on its own. Even so, it appears that, since 2003, at least six

states have found Dallas National, and derivatively Mr. Wood, to

be honest, competent, and trustworthy enough for licensing

purposes.

16. In direct contrast, OIR has pronounced Mr. Wood and

Dallas National not sufficiently honest, competent, and

trustworthy to be licensed to write insurance in Florida. ( See

Preliminary Statement).

17. After forming Dallas National in 2002-2003, its

principals concentrated on a business model wherein Dallas

National would provide workers’ compensation insurance coverage

business theory is that Dallas National benefits from more

timely and effective underwriting and claims processing because

of its access to a PEO’s payroll and computer systems and

otherwise benefits from close communication with staff leasing

personnel.

18. Mr. Wood owns PEOs operating in many of the states in

which Dallas National does business. He opened his first PEO in

1991, and his first PEO in Florida in 1998. AMS Staff Leasing,

Inc., AMS Staff Leasing II, Inc., and Equity Group Leasing I,

Inc., are PEOs catering to different types of small businesses

and authorized and licensed to do business in Florida. They are

all owned 100 per cent by Mr. Wood. AMS Staff Leasing, Inc.,

does most of the staff leasing business in Florida. (Hereafter,

AMS Staff Leasing Inc., and AMS Staff Leasing II, Inc., will be

referred to as “AMS” and Equity Group Leasing I, Inc., will be

referred to as “Equity.”)

19. Companion Property and Casualty Insurance Company

(Companion) is domiciled in South Carolina and is an OIR-

authorized property and casualty insurer in Florida. Companion

currently provides workers’ compensation coverage to Mr. Wood’s

Florida PEOs, AMS and Equity.

20. At the present time, DNIC Insurance Holdings, Inc., a

holding company owned 100 per cent by Mr. Wood, owns Jefferson

Life Insurance Company and, through another entity, owns

Petitioner herein, Dallas National Insurance Company.

21. At the present time, Aspen Administrators, Inc.

(Aspen), is a Florida-licensed “third party administrator.”

Aspen is owned 100 per cent by Mr. Wood. Aspen now processes

workers’ compensation claims for Companion in Florida.

Previously, it processed claims for Providence Property and

Casualty Insurance Company (Providence) in Florida. Aspen also

handles workers’ compensation claims on behalf of Dallas

National in a number of other jurisdictions.

22. Dallas National or Companion can cease to do business

with Aspen and hire another third party administrator at any

time. However, due to Mr. Wood ’ s and Dallas National’s

preferred business model, that is an unlikely prospect for

Dallas National.

23. Florida PEOs provide a valuable service for small

business owners. A PEO can obtain affordable workers’

compensation coverage for a large group of employees and lease

those employees to several small businesses which otherwise

could not operate. PEOs, like other employers, frequently

contract for provided bundled services by third party

administrators who perform all the claims handling, payroll tax,

human resources services, and other personnel services for the

PEO-employer.

24. In Florida, as in most states, a PEO or staff leasing

company must obtain workers’ compensation coverage through a

master policy covering all employees the PEO employs and then

leases to small businesses. California has no PEO/staff leasing

law, and individual workers’ compensation policies must be

purchased by the PEO to cover each entity to whom the PEO leases

employees. This difference has caused both California and Dallas

Fire/Dallas National some problems in the past. ( See Finding of

Fact 67).

25. Although common ownership of an insurer and affiliated

PEOs is not prohibited by Florida statute or rule, and although

Lion Insurance Company, Southern Eagle Insurance Company, and

Frank Crum Insurance Company are all licensed in Florida as

property and casualty insurers providing workers’ compensation

coverage to employers located in Florida, and although each of

these companies, like Petitioner Dallas National, is owned by a

single person or entity and is affiliated with a PEO which the

100 per cent individually-owned insurer insures in the State of

Florida, OIR is concerned about the inter-relationships of the

various entities in this case and with the fact that, as 100 per

cent shareholder of all of those entities, Mr. Wood is the

“controlling shareholder.” OIR witnesses testified that the

Agency views it as critical that a PEO and its insurer be

separated so that claims are handled and reported properly. OIR

also asserted that all three of the other similarly structured

companies and affiliates differ from Dallas National because

they use unaffiliated third party administrators, but that was

demonstrated only as to one such insurer, a start-up company

with no compliance history.

26. PEOs obtain their own Florida licenses, subject to

regulatory oversight. ( See §§ 468.524—468.535, Fla. Stat.).

Third party administrators obtain their own Florida licenses,

subject to regulatory oversight. ( See §§ 626.8805 and 626.891,

Fla. Stat.). Insurance companies obtain their own Florida

licenses, subject to regulatory oversight. ( See Conclusions of

Law).

27. No Florida statute or rule prohibits 100 percent

ownership of the stock of an insurance company by a single

individual.

28. In short, there is no Florida statute or rule that

prohibits Petitioner’s business model, but it is clear from the

testimony, and the candor and demeanor of OIR’s witnesses while

testifying, that although the Legislature has authorized

PEOs/staff leasing companies, OIR’s in-house witnesses see them

as opportunities for abuse, and they simply do not like the

concept of PEOs, which have been a legitimate business model in

Florida since the 1990 ’ s.

29. Having e liminated those statements attributed to

Agency employees in the course of litigation settlement

negotiations and relying only upon their testimony at the instant

hearing and statements made during the course of the two

licensing processes related to this particular Petitioner, which

statements reasonably constitute either Agency admissions against

interest or the Agency’s rationale in the licensing process, it

is clear that Respondent’s reviewers are holding any entity

associated with Mr. Wood or with PEOs to a higher, or at least

different, standard than other applicants for a Florida workers’

compensation insurance carrier’s license. 2/

30. OIR’s Property and Casualty Financial Oversight

Division’s review of the current Dallas National application

raised concerns about Dallas National’s relationship with its

affiliated PEOs.

31. OIR wants assurance that there are sufficient checks

and balances between the affiliated entities. “An adequate

firewall,” was the term repeatedly used. What the desired

“firewall” is supposed to accomplish was explained only to the

extent that the Agency wanted to be certain that injured workers’

compensation claimants (employed by AMS) would be timely and

correctly paid their workers’ compensation (indemnity), that

their medical bills (medical) would be timely and correctly paid

to their medical practitioners, and that Dallas National’s

underwriting practices must provide sufficient reserves to cover

the “long tail” of workers’ compensation injuries. 3/ However,

there is no OIR or Division of Workers’ Compensation rule

defining an adequate “firewall.” The Agency just believes it is

safer, or at least easier, to deny an out-of-state application

than it is to monitor a questionable non-domiciliary carrier

after licensing, even though Florida can, and does, audit out-of-

state insurers.

32. In 2006, Florida cancelled California Indemnity’s

license to do business in Florida and required that Dallas

National re-apply in its own name, which Dallas National

promptly did.

33. On December 1, 2006, Respondent OIR denied Petitioner

Dallas National’s first application for Florida licensure. A

formal proceeding under Section 120.57(1), Florida Statutes,

ensued, and Petitioner Dallas National ultimately dismissed that

proceeding and withdrew its 2006 application on the belief that

if Dallas National reconstituted its Board of Directors with

persons who were not already employees of Dallas National, OIR

would grant its next application for a certificate of

authority. 4/

34. I n 2007, Dallas National reconstituted its Board of

Directors. All current members are highly qualified in the field

of insurance. None have any adverse criminal or regulatory

history. Five-ninths of the Board (a majority) are not Dallas

National employees and not previously associated with any Wood

enterprise. These new members are Laura Wehrle, Mike Pickens,

Mick Thompson, Marta Prado Butterworth, and Betty Patterson. Ms.

Wehrle was a senior vice-president of Liberty Mutual Insurance

Company, which at the time of her service there had the largest

book of workers’ compensation business in Florida. Ms. Wehrle’s

area of expertise within Liberty Mutual was PEOs. Mike Pickens

is the former Arkansas Commissioner of Insurance, who described

Petitioner’s prior problems in that state as extremely minor.

(In 2002, while Mr. Pickens was Arkansas Insurance Commissioner,

Arkansas disciplined AMS for operating without a license for

eight months). Mick Thompson is the current Oklahoma

Commissioner of Banking. Marta Prado Butterworth is a

successful, self-made business-woman in the health care industry.

Betty Patterson was the Texas Deputy Commissioner of Insurance

who oversaw Dallas National and who graduated Dallas National

from that agency’s oversight.

35. Ms. Patterson and Mr. Pickens have been accredited,

active members of the National Association of Insurance

Commissioners (NAIC) for many years. Ms. Patterson is a

consistent award-winner in that society of state regulators.

Both Patterson and Pickens joined Dallas National’s Board quite

some time after the end of their terms of office in their

respective states (after retirement for Ms. Patterson) and well

their respective regulatory agencies.

36. Charles David Wood is Chairman of the Board of Dallas

National, but he is currently semi-retired and has been semi-

retired from all of his businesses since early 2006. Neither

he, the new five Board members, nor Mr. Nehls, who also

currently sits on the Board, has ever declared bankruptcy or

been arrested, indicted, or convicted of any crime. There also

is no evidence that either of the other two members of the

Board, who have personal and business relationships with

Mr. Wood, has any adverse bankruptcy, criminal, or regulatory

history.

37. The Board members who testified herein vigorously

defended their own integrity and that of Mr. Wood. All

described Mr. Wood as the equivalent of a member emeritus or a

supportive, but non-initiating, member of the Board who attends

meetings on an irregular basis. All agreed that, with the

exception of Mr. Wood, Dallas National now has a dynamic Board

that has considerable regular “hands on” expertise and

involvement in making Dallas National a better insurer, which is

compliant with all regulatory agencies in each of the 39

different regulatory environments where Dallas National

operates. None has found that any information has been withheld

from the Board by any of Mr. Wood's enterprises. None has found

it difficult to get any information sought from Dallas National

employees.

38. Except for Mr. Wood’s presence on the Board, the

credentials and integrity of the new Board members are

apparently not an issue for OIR, but OIR’s regulators are

concerned because Dallas National’s by-laws permit removal of

any director by a majority vote of the shareholders (that is,

unilaterally by Mr. Wood) at any special meeting of the Board

called for that purpose. There is no reason to suppose this is

a situation unique to Dallas National. ( See Finding of Fact

25).

39. OIR also considers it “problematic” that several of

Mr. Wood’s companies are housed on several floors of the same

building at the same corporate address in Dallas Texas. Of

particular concern were the first-hand observations of

Susan Bernard, Bureau Chief of the San Francisco and Sacramento

Offices of the Field Examination Division of the California

Department of Insurance. She observed that administrators for

Aspen were located in an open area of the same floor (or perhaps

two floors below) Dallas National’s offices; that AMS employees

were on the same floor as Dallas National; and that all shared

the same computer systems. Added to other factors, Ms. Bernard

and OIR interpret the foregoing as amounting to “comingling" and

located in the same Dallas office building with Dallas National

probably is more than just AMS’s and Aspen’s Texas operations,

( see infra ) but clearly, AMS and Aspen have offices in Florida

and in other states in which they do business.

40. Both Ms. Bernard and Stephen Yon, Senior Management

Analyst II with the Florida Division of Workers’ Compensation,

now part of OIR, testified that it was hard to distinguish where

Aspen or AMS left off and Dallas National began in the various

computer functions in the Dallas offices, but obviously, both

regulators were eventually able to make distinctions, because

each prepared reports based on doing so, and Mr. Yon was able to

assess Florida fines accordingly. ( See Findings of Fact 53-56).

41. That said, computers undoubtedly link Dallas National

with all its affiliates in every state, and there is no reason

to suppose that computers do not link other insurance companies,

to some degree at least, with the employers they insure, with

their insured PEOs (such as AMS) if they have them, and possibly

with the third party administrators (such as Aspen) for those

PEOs.

42. Aspen’s past reporting problems are a big part of

OIR’s denial letter for Dallas National’s current application,

as are violations of the Florida Workers’ Compensation Statute

by both AMS and Aspen ( see Findings of Fact 52-56), but no

significant comparison was made at hearing between Aspen’s

historical past errors and omissions and the historical accuracy

of any other third party administrators. Also, no significant

comparison was shown with regard to AMS’ past errors and

omissions and those of any other PEOs.

43. Another of OIR’s reasons for denying Dallas National’s

current application was the alleged incompetency,

untrustworthiness and/or “bad faith” performance of Mr. Wood in

relation to a 16 days' gap of workers’ compensation coverage of

AMS in Florida which occurred in 2002.

44. Over the years, AMS has sequentially obtained workers’

compensation coverage in Florida from several insurance

companies, among them Reliance National Insurance Company, CNA

Insurance Company (CNA), Insurance Companies of America (ICA),

Providence, and Companion.

45. Relevant to OIR’s mistrust of Mr. Wood and its

concerns with the 2002 gap of AMS coverage, were a one-million

dollar deductible workers’ compensation policy for AMS issued by

CNA prior to Mr. Wood's acquisition of Dallas Fire in July 2002.

In the last quarter of 2001, CNA had advised AMS that CNA was

preparing to stop insuring PEOs but that AMS’ CNA policy would

be renewed for the period of September 1, 2001, through

September 1, 2002, without cancellation during that period, but

without renewal at its end. Nonetheless, in late February, or

in March 2002, CNA issued a 30-day cancellation notice to AMS.

AMS sued CNA, and the suit was settled with an agreement for CNA

to continue workers’ compensation coverage in Florida for AMS

through the end of June 2002.

46. To eliminate any potential for a gap in coverage, AMS

attempted to arrange for a replacement policy to be issued by

Bankers Insurance Company (Bankers), based in St. Petersburg,

Florida. At all times material, Bankers was a Florida insurer

licensed by OIR. As part of this 2002 transaction, Bankers

essentially mortgaged or pledged a stock it owned to Mr. Wood as

security or collateral for a five-million dollar loan from him,

and in turn, Bankers was to provide workers’ compensation

coverage to AMS as of June 20, 2002, so that AMS would have no

gap in coverage when CNA pulled out. However, Bankers never

issued a workers’ compensation policy to AMS, and OIR submits

that a “handshake deal” with Bankers demonstrated Mr. Wood's bad

business judgment. 5/

47. AMS next attempted to obtain its workers’ compensation

coverage from Guerling Insurance Company. Guerling required a

five-million dollar down payment of premium to issue a

certificate of insurance to AMS for a policy to take effect at

midnight on June 20, 2002. The down payment was made, but after

relying for two weeks on the certificate of coverage obtained,

AMS (in the persons of Mr. Wood and his personal attorney

Mr. Reid) discovered that the certificate, purportedly from

Guerling, was a fake. 6/

48. As a result of the fake certificate of insurance, AMS

had operated in Florida during a 16-day gap in its workers’

compensation coverage, so even though Mr. Wood personally paid

all workers’ compensation claims which arose during the gap,

AMS, as the employer of those workers’ compensation claimants,

was required to cease business in Florida under a Division of

new Florida workers’ compensation coverage from yet another

source and also had to pay a mandatory $189,000, fine to the

Division of Workers’ Compensation, based on one-and-a-half times

the premium AMS would have had to pay if it had been covered.

Dallas National was not a party to any of the “gap” events.

49. Settlements were reached with CNA and a lawsuit

recovered Mr. Wood’s money from Bankers. Dallas National was

not a party to any of the lawsuits.

50. All of the foregoing events involving CNA, Bankers,

Guerling Insurance, and Mr. Wood (with the exception of the

ultimate recovery of Mr. Wood’s money) occurred in June-July

2002. The Texas regulatory agency did not approve Mr. Wood’s

acquisition of Dallas Fire until later. See supra .

51. Given the timing of events and the extraordinary

efforts of AMS and Mr. Wood to ensure uninterrupted workers’

compensation coverage for AMS, plus Mr. Wood's covering AMS’

losses to workers’ compensation claimants out of his own pocket,

the undersigned is not persuaded that AMS, Dallas National,

Mr. Wood, or Mr. Reid evidenced any untrustworthiness, bad

faith, or incompetence as alleged by OIR in relationship to

these 2002, events.

52. In 2005, while Providence was AMS’ workers’

compensation carrier, the third party administrator, Aspen, which

was not then incorporated and licensed to adjust claims in

Florida, illegally adjusted claims for Providence.

53. Stephen Yon, Senior Management Analyst II, is aware

that Aspen is now a Florida-licensed third party administrator

servicing several workers’ compensation insurance carriers doing

business in Florida. However, Mr. Yon’s 2005 audit of Aspen’s

processing of claims for Providence showed a “no license” period

and also showed late filings of various workers’ compensation

forms with the Division and late payments to claimants. A

mandatory fine was imposed. The same situation with late form

filings and late payments was found by Mr. Yon’s audits of Aspen,

working for Providence and then Companion in 2007, and fines were

again paid. Although efforts have been made in 2007-2008, by

Dallas National, through Board member Ms. Wehrle, to create a

diary system that would reduce these timeliness errors, there has

been little improvement to date. Apparently, there were 10

filings that were only one day late out of 68 filed, but other

reportage and/or payments were more delayed and the Agency views

all these activities as “hazardous practices.”

54. Florida law requires that the employer (PEO) be active

and participating in some of the reportage, and the essence of a

third party administrator system is that the errors and omissions

of the third party administrator relate back to the insurance

carrier. In all of the foregoing incidents, AMS was the employer

and Aspen was handling claims for either Providence or Companion,

not Dallas National.

55. Insurance carriers ’ failures to file forms timely or

to pay benefits timely as previously related are common in the

processing of Florida workers’ compensation insurance claims.

Workers’ compensation claimants are supposed to receive their

first indemnity checks within 14 days, and some reports must be

filed within seven days, and others within 21 days, of the

injury, not just within a period following a formal claim ( see

Section 440.185, Florida Statutes) and the Division requires 95

percent accuracy. ( See § 440.20 (8)(b), Fla. Stat.). Fines on

these bases are mostly mandatory, but the Division of Workers’

Compensation may distinguish between willful and non-willful

violations. ( See § 440.525, Fla. Stat.). It is unclear which

type of fine(s) were imposed on Aspen, and thus the respective

insurance companies, for the foregoing failures. That said, it

appears that, contrary to Mr. Yon’s testimony that the only way

to discipline an insurer, PEO, or third party administrator is

with a fine, other disciplinary action might be available against

Aspen ( see §§ 626.8805 and 626.891, Fla. Stat.), but Florida did

not take any other disciplinary action, even though AMS/Aspen has

never met the statutory goal of 95 per cent timely payments and

has vacillated between 70 and 80 per cent for three years. The

failure to pursue any regulatory remedy against AMS and/or Aspen,

such as revoking their licenses, suggests that these errors are

not truly significant to the Agency.

56. Companion is PEO/Employer AMS’ current workers’

compensation carrier. AMS, while insured by Companion, paid some

first day medical claims, because Texas allows an employer to pay

on-site first aid claims, and the company’s operatives assumed

that such payments were also permitted in Florida. They were

wrong. Florida actually requires that all workers’ compensation

claims be paid by the insurance carrier from the first day. AMS

stopped its illegal procedure when informed of the violation by

the Florida Division of Workers’ Compensation. Companion was

assessed a fine of only $2500, based on the claims adjusted by

AMS. Mr. Yon agreed it was acceptable to the Agency to move

licensed AMS adjusters to Aspen, so as to resolve the illegal

adjusting problem. There have been no violations of this sort

for two years. Companion now pays all medical bills.

57. OIR asserts that Messrs. Wood and Nehls, personally,

and Dallas National as a corporate applicant, have lied to OIR in

each of the two successive application processes.

58. With regard to the 2006 application, OIR conducted an

evidentiary hearing. The transcript thereof is in evidence and

although there is a question-and-answer format in which Mr. Wood,

Mr. Nehls, and others answered questions, most of the “hearing”

is more in the nature of a formalized marathon conversation,

which moves from topic to topic with several people chiming in to

clarify what OIR’s hearing officer was seeking by a question or

to answer the question, or with the hearing officer trying to

clarify what Dallas National’s witnesses meant by their answers.

Under these circumstances, someone not involved in a company’s

day-to-day operation might reasonably fail to answer some

questions correctly or fail to correct or elaborate on his

answers as the proceeding moved on.

59. Nonetheless, clearly, Mr. Wood incorrectly answered

some questions put to him at that hearing by Florida regulators.

He testified that with regard to any and all S&P companies with

which he was affiliated (1) they had not failed to hold an

annual shareholders’ meeting; (2) had not charged unapproved

rates; (3) had not operated in any state without a license; (4)

had not continued in business after losing workers’ compensation

coverage; (5) had not paid claims from collateral funds; and

(6) had not become a party to any service agreement including

re-insurance, which was not reported to the state of domicile on

the appropriate state licensure.

60. At the instant hearing herein, it was shown that at

some point before, or while, Dallas National was under Texas

oversight in 2002-2003, Mr. Wood, indeed, did not, as required

by law, meet with himself for regular shareholders’ meetings, so

that with regard to the situation with CNA, Bankers, and

Guerling, in 2002 ( see Findings of Fact 45-51) his answers to

questions (3), (4) and (5) should have been “yes.” ( See also

Findings of Fact 34, 52, and 67, as to reasons that question (3)

should have been answered “yes.”) However, the instant hearing

did not demonstrate that his answers to questions (2) and (6)

were clearly wrong.

61. OIR attributed all six negative answers to lack of

trustworthiness. Although Mr. Wood unilaterally and voluntarily

submitted an affidavit attempting to correct some of his hearing

testimony a couple of weeks after the evidentiary hearing, his

affidavit does not really clarify or alter his wrong answers to

these questions, and it was a serious omission for Mr. Wood to

have not acknowledged the problems that Dallas Fire, AMS, and

Aspen have had, if he was aware of them, even though they were

remote in time.

62. OIR also construes the business plan submitted with

Dallas National’s 2006 application to be suspect. The

application required that Mr. Wood list all the companies he

owns, but he failed to list Aspen, third party administrator for

AMS and Equity, on a chart and may have failed to list either

Aspen or Equity, one of his Florida PEOs, in the space provided

on another page. Mr. Wood testified herein that the omission

was an oversight.

63. Mr. Nehls, Petitioner’s president, who prepared both

applications, testified that the oversight was probably his, and

the evidence as a whole supports a finding that Mr. Wood had no

current “hands on” administration of either Aspen or Equity in

relation to the time of either of Dallas National ’ s applications

to OIR and did not prepare either voluminous application, both

of which went back and forth with supplements to OIR for a

period of time till each was pronounced “complete.”

64. Because he signed both applications, OIR views the

omission(s) of the companies as a material misrepresentation,

reflective of Mr. Wood ’ s lack of trustworthiness, but given the

fact that all the companies were listed somewhere in the

application papers; the parties’ past history, which meant that

OIR knew of these companies’ probable affiliation with Dallas

National and indeed asked questions about them; the due

diligence known to be Florida regulators’ hallmark; and the

testimony of OIR’s witnesses that failure to list a company is

not an absolute bar to licensing, it is unreasonable to suppose

that any plot existed within Dallas National, with Mr. Woods, or

with Mr. Nehls to hide these companies or Mr. Wood’s

affiliations therewith from Florida regulators.

65. OIR also faults Mr. Wood personally for a portion of

the current 2008 application, which discusses Dallas National’s

plans to expand into the California insurance market, claiming

that this was also a material misrepresentation since California

has not yet approved Dallas National to write insurance in that

state. Recognizing that Dallas National remains licensed in

California, but is not yet authorized to write insurance there,

a situation impossible under Florida’s law, and that Mr. Nehls

placed discussion of what Dallas National planned to do in

California under a heading of the 2008 application which equates

with “future business plans,” this information was not a

material misrepresentation.

66. OIR has doubts about Dallas National’s underwriting

parameters. For this aspect of the case, OIR relied heavily on

the testimony of Susan Bernard. Ms. Bernard was accepted as an

expert in California financial and regulatory examinations.

Unlike Florida, California does not license PEOs, but like

Florida’s OIR, California’s regulatory agency mistrusts insurers

affiliated with PEOs, even though Ms. Bernard was not able to

represent that such an affiliation offended California’s

insurance code.

67. California requires that a PEO obtain a separate

workers’ compensation policy for each employer to whom it leases

employees. ( See Finding of Fact 24). In July 2003, Dallas

National was not permitted to sell insurance in California, but

Mr. Wood’s company, AMS, secured, through another entity, what a

California corporation that leased employees from AMS was led to

believe was a valid Dallas Fire workers’ compensation policy.

The policy was disavowed by Dallas Fire, and therefore, the

small employer who leased employees from California AMS suffered

a gap in coverage in violation of California’s Labor Code and

its leased employees also were without workers’ compensation

coverage for that same period. Someone at AMS or at Dallas Fire

apparently described the invalid policy or binder as a “test

certificate,” and California’s Insurance Department issued a

scathing letter of admonishment to Dallas Fire with the promise

of a cease and desist order if Dallas Fire ever again issued

such a disingenuous document or wrote insurance in California

without Agency approval to do so. Based on the timing of the

transitioning of Dallas Fire into Dallas National, it is hard to

be sure what really happened in this situation, but so far as

this record is concerned, neither Dallas Fire nor Dallas

National has done anything similar since.

68. Ms. Bernard, a Certified Financial Examiner, has

performed three onsite visits to Dallas National’s Texas

headquarters to consider recommending licensure of Dallas

National by California. These visits were in August 2006,

August 2007, and December 2007. She testified that, based on a

reasonable sample in August 2006, Dallas National’s compliance

with its own underwriting guidelines was non-existent. Her

sampling in August 2007, produced only minimally better

adherence to Dallas National’s own guidelines, and on that

occasion, Dallas National’s own accountants, Ernst & Young, also

found significant underwriting flaws, while the Texas Department

of Insurance approved the underwriting at that time. Her

sampling in December 2007, using Dallas National’s new

underwriting guidelines, again was only slightly better than the

last time, but Ms. Bernard conceded that at the same time she

audited Dallas National on that occasion, the Texas Department

of Insurance was also present and again found Dallas National’s

underwriting compliance in December 2007, to be acceptable.

69. Ms. Bernard’s report at the close of her examination

in December 2007, was partially affected by her concern over the

proximity of AMS and Dallas National’s offices being in a single

building and using the same computers ( see Findings of Fact 39-

41), and her speculation that a 2007 sports event disaster

involving a different Wood company could deplete the reserves of

Dallas National and all Wood corporations. However, on the

basis of Dallas National’s failure, at that time, to

consistently apply its own underwriting guidelines, Ms. Bernard

recommended that California not license Dallas National until

Dallas National met all its own underwriting guidelines.

70. Due to California’s time and budget constraints,

Ms. Bernard has not returned to audit Dallas National since

December 2007, despite urgings by Dallas National’s Board to do

so.

71. In 2008, a Board-authorized underwriting committee

spear-headed by Ms. Patterson and Ms. Wehrle completely

overhauled Dallas National’s underwriting guidelines.

Ms. Bernard has not reviewed Dallas National’s new underwriting

guidelines, and Ms. Wehrle did not elaborate on them in detail.

However, there is no current information that these guidelines

are not adequate nor that they are not being followed. Since

effective underwriting plays into the overall financial picture

of an insurance company, the current reports of actuaries and

accountants for Dallas National ( see infra ) would seem to

suggest that Dallas National’s underwriting is currently

adequate.

72. Since Petitioner Dallas National was created out of

the merger of California Indemnity and Dallas Fire, Dallas

National has employed Milliman, Inc., a prominent, independent

actuarial firm with 60 years of experience and a credible

reputation. Milliman, Inc., has advised Dallas Fire from the

time Mr. Wood purchased Dallas Fire in 2002, and has given

financial rating) each year since 2003.

73. Dallas National uses A-rated reinsurance partners and

independent accountants and auditors. One of its independent

accountants is Ernst & Young.

74. Dallas National uses independent investment advisors

to maintain a conservative and profitable investment portfolio.

75. Dallas National relies heavily on opinions of all

these advisers with regard to loss reserves and collateral.

76. OIR faults Dallas National in two technical compliance

categories. First, OIR claims that Companion is “fronting” for

Dallas National in violation of Subsections 624.404(4)(a) and

(b), Florida Statutes. Second, by citing what OIR asserts is an

illegal re-insurance agreement with Companion, OIR charges that

Dallas National has set up insufficient loss reserves.

77. Section 624.404, Florida Statutes, provides, in

pertinent part, as follows:

624.404 General eligibility of insurers for

certificate of authority.--To qualify for and

hold authority to transact insurance in this

state, an insurer must be otherwise in

compliance with this code and with its

charter powers and must be an incorporated

stock insurer, an incorporated mutual

insurer, or a reciprocal insurer, of the same

general type as may be formed as a domestic

insurer under this code; except that:

(4)(a) No authorized insurer shall act as a

fronting company for any unauthorized

insurer which is not an approved reinsurer.

(b) A "fronting company" is an authorized

insurer which by reinsurance or otherwise

generally transfers more than 50 percent to

one unauthorized insurer which does not meet

the requirements of s. 624.610 (3)(a), (b),

or (c), or more than 75 percent to two or

more unauthorized insurers which do not meet

the requirements of s. 624.610 (3)(a), (b),

or (c), of the entire risk of loss on all of

the insurance written by it in this state ,

or on one or more lines of insurance, on all

of the business produced through one or more

agents or agencies, or on all of the

business from a designated geographical

territory, without obtaining the prior

approval of the office.(Emphasis supplied)

78. No case law has developed around Florida’s “fronting”

statute.

79. When OIR advised Dallas National’s new Board of

Directors that the Agency viewed Dallas National’s relationship

with Companion as a “fronting” situation, the Board, including

the former state regulators, closely reviewed the statute. The

Board members collectively could not discern how Florida’s

“fronting” statute could be applied to Dallas National’s

situation with Companion, and sought advice from Companion,

Ernst & Young, and Milliman, Inc. Relying on consistent advice

from all these entities that Florida’s “fronting” statute did

not apply, Dallas National’s Board proceeded to administrative

hearing.

80. Mr. Wood's PEOs have been issued high deductible

workers’ compensation policies by Companion. Companion and

Dallas National have a re-insurance agreement which starts with

a million-dollar deductible, whereby Companion agrees to pay the

first million dollars per claim by each employee of the PEO.

Thereafter, Companion must seek reimbursement from the

policyholder, the PEO. Dallas National re-insures claims

between one and five million dollars. Other reinsurance

coverage for Companion is provided by other companies for claims

between five and 30 million dollars, and Companion is the direct

writer above 30 million dollars.

81. OIR witnesses who had never reviewed the actual

reinsurance agreement in this case were not helpful by their

opinions that a “fronting” situation exists, and those opinions

are discounted.

82. Steve Szypula currently is the Chief Analyst in OIR’s

Property and Casualty Oversight Unit. He was accepted as an

expert in financial regulation, accounting, and regulation

examination, and testified that the providing of reinsurance

coverage by Dallas National to Companion for workers’

compensation coverage written by Companion for AMS constituted

an unlawful “fronting” arrangement in violation of Subsections

is not specifically workers’ compensation, and he has no

background in reinsurance, specifically.

83. Mr. Szypula found no fault with the Milliman Inc.

December 31, 2008, report, including reserves or its

calculations and agreed that, with or without a high deductible,

Companion is always required to pay workers’ compensation claims

from the first dollar. However, his “fronting” theory requires

that the statutory phrase, “entire risk of loss” be read as the

single word, “premium,” and that the million-dollar deductible

in the subject insurance policy be equated with a “credit risk."

By his interpretation, Mr. Szypula opined that more than 50

percent of Companion’s risk was being ceded to Dallas National

because the premium was a simple “pass through.”

84. Ray Neff is a Member of the American Academy of

Actuaries; the former Director of the Florida Division of

Workers’ Compensation, when the Division was housed in the

Department of Labor; and a former Bureau Chief of the Florida

Department of Insurance Bureau of Rates. Mr. Neff is an actuary

and certified Reinsurance Arbitrator, and was accepted as an

expert with special knowledge regarding re-insurance

arrangements and interpretation of re-insurance agreements and

insurance in general.

85. Mr. Neff agreed with Mr. Szypula that, under the re-

insurance agreement between Dallas National and Companion,

Companion takes the risk of loss on the entire claim and is

liable from the first dollar, due to the nature of workers’

compensation insurance, as compared with other types of

insurance/re-insurance. He further testified that the insurer

must pay the deductible first and may only seek reimbursement

from its re-insurers later. Therefore, Companion is liable for,

and must first pay, all claims, regardless of whether there is,

or is not, eventual reimbursement by re-insurers.

86. Concentrating on the phrase “entire risk of loss” as

used in Section 624.404(4)(b), Florida Statutes, Mr. Neff opined

that an unlawful “fronting” arrangement did not exist between

Companion and Dallas National by the terms of their re-insurance

agreement in this case. By that agreement, Dallas National

agrees to insure between one million and five million dollars in

liability. The one million dollar deductible policy issued to

AMS by Companion does not mean that Companion does not assume

the risk of the first million dollar loss, because via Florida

Administrative Code Rule 69O-189.006, 7/ the insurer is always

responsible for first paying the injured claimant directly,

regardless of any deductible, and only thereafter may seek

reimbursement. Mr. Neff maintains that, unlike those other

types of casualty insurance which are Mr. Szypula’s forte,

reinsurance of workers’ compensation policies is only a

reimbursement mechanism and not a true deductible. Because of

his education, training, and experience, his clarity of

explanation, and particularly his use of the actual language of

the “fronting” statute analyzed, Mr. Neff is the more credible

witness over Mr. Szypula.

87. OIR presented the testimony of Joseph Boor, who

reviews general lines, commercial, intangible and surety rate

filings for OIR. Mr. Boor has special experience in hurricane

losses. He is an esteemed actuary, a member of the Casualty

Actuarial Society, and the first person in the United States to

have achieved the “Senior Professional of Insurance Regulation”

designation by NAIC. However, Mr. Boor does not review workers’

compensation rate filings. He was accepted as an expert in

actuarial science, loss reserving, and large deductible business

practices. Even though he did not point to any errors in

Milliman Inc.’s December 31, 2008, annual actuarial report,

Mr. Boor used that report to conclude that Dallas National is

deficient in loss reserves by plus or minus 42 million dollars.

88. Mr. Boor was brought on relatively late in

Respondent’s preparation of the case and purely for purposes of

litigation testimony. Accordingly, he had to revise his figures

several times. To his credit, in the highest standards of his

profession, Mr. Boor pro-actively disclosed his mathematical

errors to all concerned.

89. Milliman, Inc., conducted an independent loss reserve

analysis of Dallas National as of December 31, 2008, 8/ on both a

gross and net basis with respect to reinsurance and rendered its

year-end statement of actuarial opinion on the held reserves of

Dallas National. Two fully credentialed actuaries (both Fellows

of the Casualty Actuarial Society) performed the work, including

a review of the company’s entire claim liability, which went

through two peer reviews, one of which was “firm-wide,” before

Milliman, Inc., issued its final opinion. Robert Meyer, a

principal and consulting actuary of that firm, is a Fellow of

the Casualty Actuarial Society and a Member of the American

Academy of Actuaries. He was accepted as an expert actuary in

the field of property and casualty insurance. He explained

Dallas National’s loss reserving process and critiqued

Mr. Boor’s methodology and conclusions, to the effect that

Mr. Boor used reserves in place of collateral so as to overstate

collateral; had suggested reserves be posted before a loss

occurred; and made unreasonable assessments on claims now and in

the future. Vastly simplified, Mr. Meyer’s defense of Milliman

Inc.’s report, approving Dallas National’s loss reserves as

reasonable, is more credible than Mr. Boor’s opinion for the

foregoing reasons, and most particularly because Mr. Boor skewed

loss development factors on the basis of his choice of an

industry database, and his adjustment thereof, which

overestimated the claim liability of Dallas National and

Companion.

CONCLUSIONS OF LAW

90. The Division of Administrative Hearings has

jurisdiction of the parties and subject matter of this cause,

pursuant to Sections 120.569 and 120.57(1), Florida Statutes

(2009).

91. The duty to go forward and the burden of proof by a

preponderance of the evidence is upon Petitioner. Department of

Banking & Finance v. Osborne Stern & Co. , 670 So. 2d 932 (Fla.

1996); Florida Department of Transportation v. J.W.C. Co., Inc. ,

396 So. 2d 778 (Fla. 1st DCA 1981). In Osborne Stern & Co. ,

supra , the Florida Supreme Court found that in a license

application proceeding, the agency has the burden to prove

specific acts of misconduct by a preponderance of the evidence

if it seeks to deny a license application on that ground. In

contested license application proceedings, the party asserting

the affirmative of an issue has the burden to present evidence

as to that issue, and an administrative decision denying a

license will not be sustained unless the decision is supported

by competent substantial evidence in the record. While the

applicant continuously has the burden of persuasion to prove

entitlement, if the agency proposing to deny the requested

license bases its decision on specific acts of misconduct that

the agency claims demonstrate the applicant’s lack of fitness to

be licensed, the agency assumes the burden of proving the

specific acts of misconduct that it claims demonstrate the

applicant’s unfitness to be licensed. See also M.H. v.

Department of Children and Family Services , 977 So. 2d 755 (Fla.

2d DCA 2008). Accordingly, even though a license applicant

continuously has the burden of persuasion to prove entitlement,

the agency denying the license has the burden to produce

evidence to support its denial. Similar to a discrimination

case, the agency is not required to prove its allegations by

clear and convincing evidence, but it may not deny a license

application unless its decision is supported by competent

substantial evidence. Comprehensive Medical Access, Inc. v.

Office of Insurance Regulation , 983 So. 2d 45 (Fla. 1st DCA

2008). Competent substantial evidence is such evidence as is

“sufficiently relevant and material that a reasonable mind would

accept it as adequate to support the conclusions reached.”

Comprehensive Medical Access, Inc. , 983 So. 2d at 46.

92. The seminal licensing statutes to be applied are:

624.401 Certificate of authority required.--

(1) No person shall act as an insurer, and

no insurer or its agents, attorneys,

subscribers, or representatives shall

directly or indirectly transact insurance,

in this state except as authorized by a

subsisting certificate of authority issued

to the insurer by the office, except as to

such transactions as are expressly otherwise

provided for in this code.

and

624.404 General eligibility of insurers for

certificate of authority.--To qualify for

and hold authority to transact insurance in

this state, an insurer must be otherwise in

compliance with this code and with its

charter powers and must be an incorporated

stock insurer, an incorporated mutual

insurer, or a reciprocal insurer, of the

same general type as may be formed as a

domestic insurer under this code; except

that:

* * *

(3)(a) The Office shall not grant or

continue authority to transact insurance in

this state as to any insurer the management,

officers, or directors of which are found by

it to be incompetent or untrustworthy; or so

lacking in insurance company managerial

experience as to make the proposed operation

hazardous to the insurance-buying public; or

so lacking in insurance experience, ability,

and standing as to jeopardize the reasonable

promise of successful operation; or which it

has good reason to believe are affiliated

directly or indirectly through ownership,

control, reinsurance transactions, or other

insurance or business relations, with any

person or persons whose business operations

are or have been marked, to the detriment of

policyholders or stockholders or investors

or creditors or of the public, by

manipulation of assets, accounts, or

reinsurance or by bad faith.

* * *

(4)(a) No authorized insurer shall act as a

fronting company for any unauthorized

insurer which is not an approved reinsurer.

(b) A "fronting company" is an authorized

insurer which by reinsurance or otherwise

generally transfers more than 50 percent to

one unauthorized insurer which does not meet

the requirements of s. 624.610 (3)(a), (b),

or (c), or more than 75 percent to two or

more unauthorized insurers which do not meet

the requirements of s. 624.610 (3)(a), (b),

or (c), of the entire risk of loss on all of

the insurance written by it in this state ,

or on one or more lines of insurance, on all

of the business produced through one or more

agents or agencies, or on all of the

business from a designated geographical

territory, without obtaining the prior

approval of the office. (Emphasis supplied)

93. OIR affirmatively pled that Companion was “fronting”

for Dallas National. Oddly, OIR apparently has never sought to

discipline Companion for this alleged “fronting,” but only seeks

to deny Petitioner’s license application on that theory. OIR’s

“fronting” theory requires that one read the single word

“premium” in place of the entire phrase, “risk of loss.”

94. Even understanding that the Agency’s expert achieved

his interpretation of the statute by modifying the language

in this state,” that expert’s interpretation is torturous.

95. Where, as here, the Legislature has not defined the

words used in a phrase, the language should usually be given its

plain and ordinary meaning. Southern Fisheries Association,

Inc. v. Dept. of Natural Resources , 453 So. 2d 1351 (Fla. 1984).

96. Although obligated to give deference to OIR’s

statutory interpretations [ Fortune Ins. Co. v. Dep’t. of Ins. ,

644 So.2d 312 (Fla. 1st DCA 1995); Public Employee Relations

Comm’n v. Dade County Public Benevolent Ass’n, 467 So.2d 987

(Fla. 1985); O’Conner v. Dept. of Professional Regulation,

Constr. Indus. Licensing Bd. ], as pithily observed by the Second

District Court of Appeal in Cepcot Corp. v. Dept. of Business

and Professional Regulation , 658 So.2d 1092 (Fla. 2d DCA 1995),

the undersigned is “not obligated to dive off the deep end.”

97. The undersigned has found no source listing “premium”

as a synonym for “risk,” as urged by OIR.

98. The Florida Statutes do not reveal a definition of

“risk,” associated with Florida’s insurance code, but Black’s

Law Dictionary, Fifth Edition, copyright 1979, gives the

following definition of “risk”:

In insurance law the danger or hazard of a

loss of the property insured; the casualty

contemplated in a contract of insurance; the

degree of hazard; a specified contingency or

peril . . .

99. Section 427.403, Florida Statutes, defines “premium”

as:

“Premium” is the consideration for

insurance, by whatever name called. Any

“assessment,” or any “membership”, “policy”,

“survey,” “inspection,” “service” or similar

fee or charge in consideration for an

insurance contract is deemed part of the

premium.

100. Therefore, since, in plain and ordinary usage, an

insurance premium is a marketing term for the actual amount of

money charged by an insurance company for active coverage, the

Agency’s interpretation of its “fronting” statute is not

reasonable. Ceding a premium amount to another insurer is not

identical to ceding the entire risk of loss on the peril for

which the insurance is issued. Therefore, based on the facts as

found, and the maxim to apply the plain meaning of the words in

a statute, it is concluded that OIR has not linked Companion and

Dallas National in a “fronting” relationship.

101. OIR also affirmatively pled that Dallas National had

skewed its rates and claims statistics so as to have

insufficient reserves. OIR did not prove that premise, either.

102. On all other issues, OIR’s denial of an insurance

carrier license to Dallas National hinges upon past problems the

Division of Workers’ Compensation has had with either AMS (a

PEO) or Aspen (AMS’s third party administrator) or some other

insurance company, such as Providence or Companion. Florida’s

Workers’ Compensation Law attributes a third party

administrator’s errors and omissions to the carrier utilizing it

at the time of the error or omission, and OIR did that via

fines.

103. The licensing standards for PEOs and third party

administrators are minimal, but the power to grant a license

encompasses the power to discipline that license. How those

licenses might be disciplined beyond the fines already imposed

is conjectural in the absence of case law, but it is a

reasonable option for OIR to discipline the adjusters and

administrators over whom it has authority and to initiate a

complaint to the appropriate arm of the Department of Business

and Professional Regulation concerning any PEO. Rejecting the

application of an insurer that wants to use those PEOs and third

party administrators is not a reasonable option.

104. Likewise, just because Mr. Wood owns 100 per cent of

AMS’ and Aspen’s respective stock issues, does not mean he is

rendered personally untrustworthy due to those corporations’

day-to-day minimal failures throughout 39 states and the

District of Columbia.

105. The gap in coverage in 2002, due to Mr. Wood’s

dealings with Bankers and Guerling has been fully explained.

OIR apparently now considers this episode only a bad business

decision, not untrustworthiness, but it evidences neither, and

the episode that resulted in a gap in coverage for AMS, never

involved Dallas National and has never affected Mr. Wood’s or

Dallas National’s solvency or reserves. Mr. Wood’s subsequent

success and that of Dallas National do not support a conclusion

of incompetency.

106. Most of OIR ’ s concerns with other states' regulatory

issues are remote in time and unlikely to be repeated because

they arose prior to Dallas Fire being either taken over by

Mr. Wood or before it was fully transitioned into Dallas

National.

107. Dallas National’s underwriting problems in 2006-2007,

which were revealed by Ms. Bernard, and the continuing reporting

and payment problems of Aspen deserve attention. However,

because Ms. Bernard's observations with regard to underwriting

showed improvement on each of her visits; because Texas has

repeatedly approved Dallas National while observing the same

underwriting problems noted by Ms. Bernard; because other states

have also approved Dallas National; because Ms. Wehrle is clear

that tighter underwriting guidelines are constantly evolving at

Dallas National; because Mr. Yon had no significant problems

auditing any Florida entities in Dallas; and because of the

fiscal responsibility demonstrated by Dallas National’s

accounting and actuary witnesses, it is concluded that Dallas

National has presented adequate evidence for Florida licensure.

RECOMMENDATION

Based upon the foregoing Findings of Fact and Conclusions

of Law, it is RECOMMENDED that the Office of Insurance

Regulation enter a Final Order issuing the license for which

Petitioner Dallas National Insurance Company has applied.

DONE AND ENTERED this 3rd day of February, 2010, in

Tallahassee, Leon County, Florida.

S

ELLA JANE P. DAVIS

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

[phone]

Fax Filing [phone]

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 3rd day of February, 2010.

ENDNOTES

1/ It seems that in California and several other states, a

prudent insurance carrier will not apply for a license until

virtually assured, through informal procedures, that the license

will be granted. However, Dallas National has repeatedly

requested that California examine and license it. See also

Findings of Fact 66-70.

2/ OIR witnesses related valid concerns based on problems

occurring with the startup of PEOs in the early 1990’s when some

heavy duty construction workers were intentionally miscoded as

secretaries in order to offer reduced premiums, which miscoding

skewed data and reserves with regard to catastrophic injuries,

but their testimony never linked such incidents to Dallas

National or to any Wood enterprise.

3/ Workers’ compensation insurance generally is a riskier type

of insurance to write than other types of insurance because

workers’ compensation claims may have to pay out over long

periods of time, up to 30 years. The potential spread of years

requiring higher reserves than some other types. Because some

Florida benefits must be paid for an injured employee’s

lifetime, as opposed to a finite number of years (as is the case

in Texas) the claim reserves must be that much more secure in

Florida.

4/ Those OIR employees who testified herein denied that OIR had

made such an offer, but there is sufficient credible evidence to

show that Dallas National’s attorneys and principals, for

whatever reason, believed that there was an advantage to

withdrawal of the 2006, application as opposed to possible

rejection of it.

5/ Apparently, despite still being fully licensed in Florida,

Bankers and its principals had been under OIR suspicion or

investigation for criminal activity for a period of time, and it

appears Mr. Wood was also victimized.

6/ One individual Mr. Wood dealt with may have been connected

with both Bankers and Guerling, and it is not clear whether

Guerling, based in New York, had an appropriate license to write

insurance in Florida, but the undersigned is satisfied that

Mr. Wood and Mr. Reid were of the reasonable belief that

Guerling could legally issue coverage for AMS in Florida.

7/ Florida Administrative Code Rule 69O-189.006, reads:

Guidelines for Large Deductible Workers’

Compensation Filings.

If a workers’ compensation insurer wishes to

file for a large deductible, such filing

shall be governed by the following

guidelines:

(1) Eligibility: Minimum standard premium

of $500,000; Minimum deductible of $100,000.

(2) Insurer must be clearly obligated to

pay first dollar of loss just like any other

workers’ compensation policy without a

deductible.

(3) Reimbursement of deductible by

insured does not affect insurer obligation

to pay losses.

(4) Insurer must continue all filing

requirements with Department of Financial

Services in compliance with Chapter 440,

F.S., for all losses including those below

the deductible limits.

(5) Insurer must file unit statistical

reports with the NCCI which show all losses

including those below the deductible limit.

(6) Unit statistical reports are to be

completed and filed with the NCCI so that an

experience modification factor can be

calculated for the insured.

(7) Data must be maintained to allow for

reporting on financial calls of Standard

Premium at NCCI Level together with all

losses including those below the deductible

limit.

(8) Insurers must comply with NCCI

Aggregate Financial Calls, Detail Claim

Information Calls, Unit Statistical

Reporting, and other required calls.

(9) Insurer must have an established

program to evaluate financial ability of

insured to pay losses within the deductible.

Insurers are required to use various

financial mechanisms to insure that funds

are available from the insured to pay

deductible portion of losses.

8/ At the time of hearing, a new report was due December 31,

2009.

COPIES FURNISHED :

Elenita Gomez, Esquire

Amanda Allen, Esquire

Office of Insurance Regulation

200 East Gaines Street, Room 612

Tallahassee, Florida 32399

J. Riley Davis, Esquire

Edward L. Kutter, Esquire

Akerman Senterfitt, P.A.

106 East College Avenue, Suite 1200

Tallahassee, Florida 32301

Kevin M. McCarty, Commissioner

Office of Insurance Regulation

200 East Gaines Street

Tallahassee, Florida 32399-0305

Steve Parton, General Counsel

Office of Insurance Regulation

200 East Gaines Street

Tallahassee, Florida 32399-0305

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of this Recommended Order. Any exceptions

to this Recommended Order should be filed with the agency that

will issue the Final Order in this case.