02-003107 State Farm Florida Insurance Company vs. Department Of Insurance Status: Closed Recommended Order on Thursday, June 5, 2003.

Summary: Petitioner presented sufficient evidence to establish facts to show that its endorsements filed with Respondent should have been approved.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

STATE FARM FLORIDA INSURANCE )

COMPANY, )

)

Petitioner, )

)

vs. ) Case No. 02 - 3107

)

DEPARTMENT OF INSURANCE, )

)

Respondent. )

)

RECOMMENDED ORDE R

Upon due notice, William R. Cave, an Administrative Law

Judge for the Division of Administrative Hearings, held a formal

hearing in this matter on January 13 through 17, 2003, and

February 17, 2003, in Tallahassee, Florida.

APPEARANCES

For Petitione r: C. Ryan Reetz, Esquire

Jim Toplin, Esquire

Amie Riggle, Esquire

Greenberg Traurig, P.A.

1221 Brickell Avenue

Miami, Florida 33131

Vincent J. Rio, III, Esquire

State Farm Florida Insurance Company

315 South Calhoun Street, Suite 344

Tallahassee, Florida 32301

For Respondent: S. Marc Herskovitz, Esquire

Anthony B. Miller, Esquire

Division of Legal Services

Department of Financial Services

Office of Insurance Regulation

6 12 Larson Building

200 East Gaines Street

Tallahassee, Florida 32399 - 0333

STATEMENT OF THE ISSUE

Should the Department of Insurance (now known as the

Department of Financial Services, Office of Insurance

Regula tion) (Department) approve three insurance endorsement

forms that State Farm Florida Insurance Company (State Farm)

filed on November 15, 2001?

PRELIMINARY STATEMENT

On November 15, 2001, State Farm filed for approval

pursuant to Section 627.410, Florida Statutes, three proposed

endorsement forms (FE - 5397, FE - 5398, and FE 5399, Fungus

(Including Mold) Exclusion Endorsement (endorsements)) to its

already approved policy forms on file with the Department.

The endorsements, as distinguished by number, appl y to

different policy forms.

By letter dated June 28, 2002, the Department notified

State Farm that the previous approval of the endorsements,

approved by operation of law, was withdrawn as being in

violation of Sections 627.411(1)(b) and 626.9641(1)(b), F lorida

Statutes. The letter also advised State Farm of its rights

pursuant to Sections 120.569 and 120.57, Florida Statutes.

On July 18, 2002, State Farm filed a Petition for

Administrative Hearing Involving Disputed Issues of Fact with

the Department r equesting a formal hearing pursuant to

Sections 120.569(1) and 120.57(1), Florida Statutes. Upon

receipt of State Farm's request for a formal proceeding the

matter was referred to the Division of Administrative Hearings

(Division) for the assignment of an Administrative Law Judge and

for the conduct of a formal hearing.

On December 4, 2002, the Department moved for leave to

amend its original disapproval letter. The motion was granted

on December 5, 2002. The Department's amended disapproval

letter, w hich the Department back - dated to June 28, 2002,

reiterates the previously alleged basis for disapproval and

cites two additional purported bases for disapproval: (1) the

alleged violation of Section 626.9641(1)(b), Florida Statutes,

itself constitutes a violation of Section 627.411(1)(a), Florida

Statutes; and (2) the endorsements because they exclude coverage

that, "through custom and usage has become a standard or uniform

provision" in Florida, violate Section 627.412(2), Florida

Statutes.

At the hearin g, State Farm presented the testimony of James

Orsulak, James Horton, Richard Haberer, Jeffery McCarty, and

Richard Corbett. State Farm's Exhibits numbered 1 through 11,

22 through 25, 44 through 121, 218, 219, 227, 234 through 241,

298, 324, 325, 331 thr ough 350, and 352 through 355 were

admitted in evidence. The Department presented the testimony of

Shirley Kerns and Charles Tutwiler. The Department's Exhibits 1

through 25 and 27 through 40 were admitted in evidence.

A nine - volume Transcript of this proceeding was filed with

the Division on March 3, 2003. The parties requested, and were

granted additional time to file proposed recommended orders with

the understanding that any time constraint imposed under

Rule 28 - 106.216(1), Florida Administrative C ode, was waived in

accordance with Rule 28 - 106.216(2), Florida Administrative Code.

The parties timely filed their Proposed Recommended Orders under

the extended time frame.

FINDINGS OF FACT

Upon consideration of the oral and documentary evidence

adduced at the hearing, the following relevant findings of fact

are made:

1. State Farm is a domestic insurance company that the

Department has licensed to transact property and casualty

insurance in the State of Florida.

2. The Department is the state agency charged with the

duty to regulate insurers doing business in the State of

Florida.

3. State Farm offers five types of homeowners' policies

that have been approved for use in Florida, an FP - 7921 (HO1),

FP - 7923 (HO3), FP - 7924 (HO4), FP - 7925 ( HO5 - Extra), an d FP - 2926

(HO6). The HO1 is a "named perils" policy and provides coverage

only for those perils specifically named in the policy. This

policy is not offered in other states, and in Florida accounts

for less than one percent of all of all policies in forc e. The

HO3, HO5, and HO6 policies are known as "open perils" policies

providing coverage for all risks unless specifically excluded by

the policy. Although similar to HO3, the HO5 policy provides

somewhat broader coverage with respect to settlement provi sions.

The HO6 policy is specifically geared toward condominium owners

and the HO4 policy is the policy form that applies to renters.

Of all the policies offered in Florida, the HO3 is the most

widely used policy form and will be quoted from and used as the

exemplar in this Recommended Order.

4. The HO3 policy contains introductory provisions

entitled "Declarations" and "Definitions," and is then divided

into two coverage sections, Sections I and II. Section I refers

to property coverage and with Sectio n II referring to liability

coverage. Section I is divided into a number of subcategories

including the following: Coverage A (Dwelling), Coverage B

(Personal Property), Section C (Loss of Use), Additional

Coverage, Losses Insured, Losses Not Insured, an d Conditions.

Following the Section II provisions there are additional

sections entitled "Section I and II - Conditions" and a section

entitled "Optional Provisions."

5. The HO3 policy provides coverage under Coverage A

(Dwelling) for all risks of loss unl ess it is a "loss not

insured." As stated in the policy: "We insure for accidental

direct physical loss to the property described in Coverage A,

except as provided in SECTION I - LOSSES NOT INSURED ."

(Emphasis in the original.) However, coverage for pe rsonal

property (Coverage B) does not provide such "open perils"

coverage. Rather, it provides coverage only for 16 named

perils, contains a number of limitations on personal property

that it does cover, and reflects a number of personal property

items th at it does not cover.

6. All of State Farm's homeowners' policies currently

provide some limited coverage relating to mold. Although the

policies exclude mold as a covered peril, they provide some

limited coverage for mold - related losses resulting from c overed

perils, such as a covered water loss that causes mold - related

damage.

7. Historically, there have been exclusions in property

insurance for ordinance of law, earth movement, flood, war, the

neglect of the insured, and nuclear hazard. Mold that res ulted

from a covered peril has historically not been excluded.

8. On November 15, 2001, State Farm filed three proposed

endorsement forms (Fungus (Including Mold) Exclusion

Endorsement): (1) FE - 5397 for use with HO1 policies; (2) FE -

5398, for use with HO3, HO5, and HO6 policies; and (3) FE - 5399

for use with HO4 policies. The homeowners' policies, which the

endorsements were to apply, had been previously approved by, and

were on file with the Department, in accordance with

Section 627.410, Florida Statu tes. The goal of the endorsements

was to eliminate mold coverage from State Farm's existing

homeowners policies in Florida.

9. State Farm's current rates do not include the cost of

providing the mold coverage that the endorsements seek to

exclude. Howev er, there is insufficient evidence to establish

facts to show that State Farm would need to substantially raise

its rates to include those costs.

10. Before filing the mold - exclusion endorsements, State

Farm entered into discussions with the Department ab out giving

policyholders the choice of buying back some of the to - be -

excluded mold coverage through buy - back endorsements (buy -

backs).

11. State Farm filed its buy - backs in June 2002, after

failing to work out a solution with the Department that would

hav e allowed for their approval.

12. Although the Department disapproved the buy - backs in

December 2002, State Farm has committed itself to provide

policyholders with the optional buy - backs, if the exclusions are

approved.

13. If the exclusion endorsements are approved along with

the buy - back provisions, any cost increase would be restricted

to those policyholders who choose to purchase mold coverage

through a buy - back.

14. State Farm's filings of mold - exclusion endorsements

are consistent with a nationwid e effort by State Farm Fire &

Casualty Insurance Company, an affiliate of State Farm to

eliminate mold coverage in homeowners policies.

15. In Florida, State Farm's endorsements accomplish the

complete elimination of mold coverage chiefly through the

addi tion of a new exclusion for fungus, including mold, within

" SECTION I - LOSSES NOT INSURED ." (Emphasis in the original.)

The endorsements, when coupled with the underlying policy, state

in relevant part as follows:

2. We do not insure under any coverage

f or any loss which would not have occurred

in the absence of one or more of the

following excluded events. We do not insure

for such loss regardless of: (a) the cause

of the excluded event; or (b) other causes

of the loss; or (c) whether other causes

acte d concurrently or in any sequence with

the excluded event to produce the loss; or

(d) whether the event occurs suddenly or

gradually, involves isolated or widespread

damage, arises from natural or external

forces, or occurs as result of any

combination of these:

* * *

g. Fungus. (Emphasis in the original.)

(The text of the endorsement is underlined.)

16. The endorsements delete all references to the term

mold found in SECTION 1 - LOSSES INSURED . (Emphasis in the

original.)

17. The endorsements defin e fungus as follows:

"fungus" means any type or form of fungus,

including mold , mildew, mycotoxins, spores,

scents or byproducts produced or released by

fungi. (Emphasis furnished.)

18. This total exclusion of mold coverage, using language

clearly encom passing all manner of causation and occurrence,

replaces the mold exclusions in the existing policies that do

not use such broad language. The difference between the post -

and pre - endorsement policies can be seen from comparing the

above - quoted endorsemen t as incorporated into HO3 policy on the

one hand, with the mold exclusions as they currently exist in

the HO3 policy on the other hand. While the endorsements

totally exclude coverage for fungus (mold), and deny payment for

mold damage historically provi ded to insureds, the endorsements

are not ambiguous, notwithstanding the testimony offered by the

Department to the contrary, which lacks credibility.

19. The endorsements do not add coverage. Instead, the

endorsements eliminate coverage for mold that c urrently exists.

However, this fact alone does not render the endorsements

inconsistent, misleading, or deceptive when the endorsements are

read in their entirety along with the remaining provisions of

the policies.

20. State Farm's endorsements were ini tially deemed

approved pursuant to Section 627.410, Florida Statutes, which

provides that an endorsement filed with the Department is deemed

approved if it is not approved or disapproved within 30 days, or

45 days if there has been an extension, of its fil ing..

21. By letter dated June 28, 2002, the Department withdrew

its deemed approval of the three endorsements and notified State

Farm of its basis for disapproval.

22. The Department's original disapproval letter cites

three bases for disapproval. The Department asserts that

State Farm's endorsements: (1) contain ambiguities in violation

of Section 627.411(1)(b), Florida Statutes; (2) deceptively

affect the risk purported to be assumed in the general coverage

of the contract, also in violation of Secti on 627.411(1)(b),

Florida Statutes; and (3) deny policyholders the right to

obtain "comprehensive coverage" as that term is used in

Section 626.9641(1)(b), Florida Statutes, which is part of the

policyholders' bill of rights.

23. On December 4, 2002, the Department moved for leave to

amend its original disapproval letter. The motion was granted.

The Department's amended disapproval letter, which the

Department back - dated to June 28, 2002, reiterates the

previously alleged bases for disapproval and cites two

additional bases for disapproval: (1) the alleged violation of

Section 626.9641(1)(b), Florida Statutes, itself constitutes a

violation of Section 627.411(1)(a), Florida Statutes; and (2)

the endorsements, because they exclude coverage that "through

custom and usage has become a standard or uniform provision" in

Florida, violate Section 627.412(2), Florida Statutes.

24. There is insufficient evidence to establish facts to

show that the provision for mold coverage has, through custom

and usage, beco me a standard or uniform provision.

25. Likewise, there is insufficient evidence to establish

facts to show that there is a "natural association between mold

and water."

26. In the fall of 2001, the Department began receiving a

large influx of filings se eking to exclude or severely limit

coverage for mold. Including State Farm's filing, the

Department received between 400 and 450 filings representing

between 200 and 250 insurers primarily between October 1, 2001,

through the end of 2002.

27. In the f ace of the inordinate number of filings, the

Department sought input from all sectors of the public. The

Department met with insurers and other interested persons and

held four public forums around the state to determine the impact

the filings would have on insurance contracts, the industry, and

the market place.

28. In the mean time, the Department routinely sought

waivers from the insurers of the statutory review period set

forth in Section 627.410(2), Florida Statutes, and additionally

requested that insurers withdraw their filings.

29. Insurers were advised by the Department that failure

to waive the statutory review period or to withdraw their

filings would result in the filing being disapproved.

30. The Department initially approved the endor sements to

limit or exclude mold coverage of three insurers: USAA,

Maryland Casualty, and American Strategic. However, the

Department withdrew its approval for each of these companies in

letters dated September 18, 2002.

31. The Department asserts that it does not have a policy

to disapprove filings simply because they discuss mold or seek

to limit or exclude coverage for claims involving mold damage.

The Department admits that it is required to examine all filings

based upon the statutory scheme. Howe ver, the Department has

not approved a single one of the over 450 filings, regardless of

the language or structure of the endorsements. The simple fact

is that the Department had a policy from the fall of 2001

through December 16, 2002, imposing a morator ium on the

exclusion or limitation of mold coverage. The Department

altered that policy on December 17, 2002, when it entered into a

settlement with Florida Farm Bureau General Insurance Company

(Farm Bureau), wherein Farm Bureau's endorsement was approve d

allowing a reduction in mold coverage from policy limits to a

sub - limit of $10,000.00 per occurrence, $20,000.00 annual

aggregate. The Department's previous position that policies

offered to Florida's consumers should not be significantly

reduced was ab andoned at that time. There was insufficient

evidence to establish facts to show that the $10,000.00 coverage

was a reasonable amount of coverage for the vast majority of

claims for mold damage.

32. The endorsements seek to limit or exclude coverage for

mold that has existed for decades. There is scant Florida

experience to support the need for limitations or exclusions on

mold coverage. Even so, the Department cannot disapprove

endorsement forms without authority to do so. There is no

statutory author ity mandating mold coverage to the extent of

policy limits or otherwise in order for policyholders to have

comprehensive coverage.

33. Beginning September 15, 2001, the Department did not

approve a single mold endorsement seeking to exclude or limit

cov erage for mold as a resulting loss from a covered peril until

December 17, 2002, when it approved a filing by Farm Bureau as a

part of a settlement of an administrative proceeding in which

the parties were awaiting ruling after a final hearing.

CONCLUSIONS OF LAW

34. The Division of Administrative Hearings has

jurisdiction over the parties and the subject matter of this

proceeding. Sections 120.569 and 120.57(1), Florida Statutes.

35. State Farm has the burden of proving by a

preponderance of the evidenc e that the Department should approve

the endorsements. Young v. Department of Community Affairs , 625

So. 2d 831 (Fla. 1993).

36. Section 627.411(1)(a),(b), Florida Statutes, provides

as follows in relevant part:

(1) The Department shall disapprove an y

form filed under 627.410, or withdraw any

previous approval thereof, only if the form :

(a) Is in any respect in violation of, or

does not comport with, this code.

(b) Contains or incorporates by

reference, where such incorporation is

otherwise permissible, any inconsistent,

ambiguous, or misleading clauses, or

exceptions and conditions which deceptively

affect the risk purported to be assumed in

the general coverage of the contract .

(Emphasis furnished.)

37. Pursuant to Section 627.419(1), Fl orida Statutes,

"[e]very insurance contract shall be construed according to the

entirety of its terms and conditions as set forth in the policy

and as amplified, extended or modified by any . . . endorsement

thereto."

38. In this case, the endorsements ar e not inconsistent

with the coverage in the policies. Although the endorsements

totally eliminate coverage for mold damage, they do not contain

any provisions that conflict with the policies. To interpret

the term "inconsistent" in Section 627,411(1)(b), Florida

Statutes, as prohibiting any difference between a policy and its

endorsement, would mean that an insurer could never use an

endorsement to amend or modify a policy.

39. The endorsements, read in their entirety, in

conjunction with the policies a re not ambiguous, misleading, or

deceptive. There is nothing ambiguous, misleading or deceptive

about the endorsements eliminating mold coverage. Clearly, the

purpose of the endorsements is to eliminate mold coverage

40. The endorsements do not violate Section 627.411(1))b),

Florida Statutes, and should be approved if the Department had

disapproved them only on that basis. However, the Department

also disapproved the endorsements on grounds that they violated

Section 626.9641(1)(b), Florida Statutes, wh ich in itself was a

violation of Section 627.411(1)(a), Florida Statutes, and that

because the endorsements excluded coverage that, "through custom

and usage has become a standard or uniform provision" in Florida

they violate Section 627.412(2), Florida St atutes.

41. Section 626.9641(1)(b), Florida Statutes, states as

follows in pertinent part:

(1) The principles expressed in the

following statements shall serve as

standards to be followed by the department

in exercising its powers and duties, in

exerc ising administrative discretion, in

dispensing administrative interpretations of

the law, and in promulgating rules:

* * *

(b) Policyholders shall have the right to

obtain comprehensive coverage.

42. The Department argues that the policyholder's bill of

rights provides authority for it to disapprove the endorsements

because they take away valuable coverage that has existed for

decades, thereby interfering with the right of policyholders to

comprehensive coverage. This argument is without merit.

There fore, since the Department has failed to prove a violation

of Section 626.9641(1)(b), Florida Statutes, there is no

violation of Section 627.411(1)(a), Florida Statutes.

43. Section 627.412(2), Florida Statutes, provides as

follows:

(2) No policy shall contain any provision

inconsistent with or contradictory to any

standard or uniform provision used or

required to be used, but the department may

approve any substitute provision which is,

in its opinion, not less favorable in any

particular to the insure d or beneficiary

that the provisions otherwise required.

Section 627.412(2), Florida Statutes, has to be read in

conjunction with Section 627.412(1), Florida Statutes, which

requires that all insurance contracts contain provisions

mandated by the Insuranc e Code and failure to include that

provision is a violation of Section 627.412(2), Florida

Statutes. In this case, the policy endorsements do not "contain

any provision inconsistent with or contradictory to any standard

or uniform provision used or requir ed to be used."

44. Section 120.52(15), Florida Statutes, defines a rule

as "each agency statement of general applicability that

implements, interprets, or prescribes law or policy . . . ."

45. Section 120.52(8), Florida Statutes. states as follows

in pe rtinent part:

A grant of rulemaking authority is necessary

by not sufficient to allow an agency to

adopt a rule; a specific law to be

implemented is also required. An agency may

adopt only rules that implement, interpret

or make specific the particular po wers and

duties granted by the enabling statute. No

agency shall have authority to adopt a rule

only because it is reasonably related to the

purpose of the enabling legislation and is

not arbitrary and capricious or is within

the agency's class of powers and duties, nor

shall an agency have the authority to

implement statutory provisions setting forth

general legislative intent or policy.

Statutory language granting rulemaking

authority or generally describing the powers

and functions of an agency shall be

construed to extend no further than

implementing or interpreting the specific

powers and duties conferred by the same

statute.

46. Section 120.57(1)(e), Florida Statutes, states as

follows in relevant part:

(e)1. Any agency action that determin es

the substantial interests of a party and

that is based on an unadopted rule is

subject to de novo review by and

administrative law judge.

2. The agency action shall not be

presumed valid or invalid. The agency must

demonstrate that the unadopted rul e:

a. Is within the powers, functions, and

duties delegated by the Legislature or, if

the agency is operating pursuant to

authority derived from the State

Constitution, is within that authority;

b. Does not enlarge, modify, of

contravene the specifi c provisions of law

implemented;

c. Is not vague, establishes adequate

standards for agency decisions, or does not

vest unbridled discretion in the agency;

d. Is not arbitrary or capricious;

e. Is not being applied to the

substantially affected pa rty without due

notice;

f. Is supported by competent and

substantial evidence; and

g. Does not impose excessive regulatory

costs on the regulated person, county, or

city.

47. The Department's decision to disapprove the

endorsements because the y restrict coverage that insurers have

historically provided to policyholders is a rule as defined

under Section 120.52(15), Florida Statutes. It is a statement

of general applicability because the Department has effectively

declared a moratorium on such endorsements. The decision

interprets and prescribes law to the extent that the Department

relies on Subsections 626.9641(1)(b), 627.411(1)(a), (b), and

627.412(2), Florida Statutes.

48. As a rule that has not been adopted pursuant to the

rulemaking pro cedures of Chapter 120, Florida Statutes, the

Department's unadopted rule, including its most recent rendition

of the unadopted rule (mandating a minimum of $10,000.00 in

coverage for mold), violates Subsections 120.57(1)(e)2.a.,

120.57(1)(e)(2)b., and 120 .57(1)(e)2.d., Florida Statutes, for

the following reasons: (a) There is no statutory or rule

definition of a comprehensive homeowner's policy; (b) The

policyholder's bill of rights, as do Subsections 627.411(1)(b),

and 627.412(2), Florida Statutes, expre sses general legislative

intent and does not provide the Department with specific powers,

functions, or duties upon which it may lawfully promulgate a

rule that would prevent insurers from excluding or limiting mold

coverage; (c) The unadopted rule enlarge s the rights of

policyholders by mandating coverage for mold as part of the

insurers comprehensive policies to the extent that the

policyholders have enjoyed such coverage in the past; and (d)

The policy gives the Department unlimited discretion to define

"comprehensive coverage" to include any coverage it believes to

be "comprehensive," including mold coverage.

49. The Department admits it does not have authority to

disapprove an endorsement simply because it seeks to limit or

exclude coverage related to mold. Despite this admission, the

Department's policy makes mold coverage irrevocable. Such a

policy is clearly erroneous because insurers are generally

permitted to provide whatever contractual provisions they

determine are appropriate, subject to speci fic statutory and

rule limitations. Section 627.414, Florida Statutes, states as

follows in relevant part:

627.414 Additional policy contents. -- A

policy may contain additional provisions not

inconsistent with this code and which are:

* * *

(3) Desi red by the insurer and neither

prohibited by law nor in conflict with any

provisions required to be included therein.

In this instance, the Department is mandating coverage that is

not specifically required by statute or rule.

RECOMMENDATION

Based on the foregoing Findings of Fact and conclusions of

Law, it is

RECOMMENDED that the Department enter a final order

approving the endorsements filed with the Department by State

Farm on November 15, 2001.

DONE AND ENTERED this 5th day of June, 2003, in

Tallahassee, Leon County, Florida.

___________________________________

WILLIAM R. CAVE

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675 SUNCOM 278 - 967 5

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 5th day of June, 2003.

COPIES FURNISHED :

S. Marc Herskovitz, Esquire

Division of Legal Services

Department of Financial Services

Off ice of Insurance Regulation

612 Larson Building

200 East Gaines Street

Tallahassee, Florida 32399 - 0333

Anthony B. Miller, Esquire

Division of Legal Services

Department of Financial Services

Office of Insurance Regulation

612 Larson Building

200 East G aines Street

Tallahassee, Florida 32399 - 0333

C. Ryan Reetz, Esquire

Jim Toplin, Esquire

Amie Riggle, Esquire

Greenberg Traurig, P.A.

1221 Brickell Avenue

Miami, Florida 33131

Vincent J. Rio, III, Esquire

State Farm Florida Insurance Company

315 South C alhoun Street, Suite 344

Tallahassee, Florida 32301

Mark Casteel, General Counsel

Department of Financial Services

The Capitol, Plaza Level 11

Tallahassee, Florida 32399 - 0300

Honorable Tom Gallagher

Chief Financial Officer

Department of Financial Servi ces

The Capitol, Plaza Level 11

Tallahassee, Florida 32399 - 0300

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 Ord er should be filed with the agency that

will issue the Final Order in this case.