03-000080 Department Of Financial Services vs. Superior Insurance Company Status: Closed Recommended Order on Wednesday, August 6, 2003.

Summary: Failure to comply with Final Order results in suspension of Certificate of Authority.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF FINANCIAL )

SERVICES, )

)

Petitioner, )

)

vs. ) Case No. 03 - 0080

)

SUPERIOR INSURANCE COMPANY, )

)

Respondent. )

)

RECOMMENDED ORDER

On May 19 and 20, 2003, a formal administrative hearing in

this case was held in Tallahassee, Florida, before William F.

Quattlebaum, Administrative Law Judge, Division of

Administrative Hearings.

APPEARANCES

For Petitioner: S. Marc Herskovitz, Esqui re

Elenita Gomez, Esquire

Department of Financial Services

Office of Insurance Regulation

612 Larson Building

200 East Gaines Street

Tallahassee, Fl orida 32399 - 0333

For Respondent: James S. Grodin, Esquire

Foley & Lardner

111 North Orange Avenue, Suite 1800

Orlando, Florida 32801 - 2386

N. Wes Strickland, Esquire

Foley & Lardner

106 East College Avenue, Suite 900

Tallahassee, Florida 32301

STATEMENT OF THE ISSUES

The issues in the case are whether the Respondent has

failed to comply with a Final Order issued by the Petition er or

is otherwise conducting business in a manner which is hazardous

or injurious to policyholders or the public, and, if so, what

penalty should be imposed.

PRELIMINARY STATEMENT

By Notice and Order to Show Cause filed November 20, 2002,

the Department o f Financial Services, Office of Insurance

Regulation (Petitioner), alleged that Superior Insurance Company

(Respondent) had failed to comply with a Final Order issued by

the Petitioner. The Notice asserted that such failure was a

violation of Sections 624 .418(1)(b), 624.418(1)(d) and

624.418(2)(a), Florida Statutes, and constituted grounds for

suspension or revocation of the Respondent's Certificate of

Authority to transact business in Florida.

By Response to Order to Show Cause and Petition for Formal

H earing, the Respondent requested a formal administrative

hearing. The Petitioner forwarded the request to the Division

of Administrative Hearings, which scheduled and conducted the

proceeding.

At the hearing the Petitioner presented the testimony of

one witness and had Exhibits numbered 1 through 33 admitted into

evidence. The Respondent presented the testimony of two

witnesses. The Respondent's exhibits were presented in two

binders. From the "Correspondence Binder" Exhibits numbered 1,

6, 10, 13, 14 , 16, 17, 20 through 22, 25, 27, 28, 31, 35, 37,

38, 40, 41, 43, 44, 48 through 50, 54, 57, and 59 were admitted

into evidence. Unbound Exhibits numbered 62, 63, and 66 were

also admitted. From the "Pleadings Binder" Exhibits numbered 4,

16, 22, and 24 w ere admitted into evidence.

The three - volume Transcript of the hearing was filed on

June 4, 2003. By agreement, the parties filed Proposed

Recommended Orders on July 14, 2003.

FINDINGS OF FACT

1. The Petitioner is the state agency responsible for

lice nsure and regulation of insurance companies transacting

business in Florida. The Petitioner was formerly identified as

the Department of Insurance.

2. The Respondent is an insurance company licensed to

transact business in Florida and holding a Certifi cate of

Authority to engage in the domestic automobile insurance

business.

3. The Respondent owns Superior American Insurance Company

and Superior Guaranty Insurance Company, both of which are

licensed Florida insurance companies.

4. The Respondent is wholly owned and managed by Superior

Insurance Group, Inc. (SIG). SIG is owned by Goran Capital,

Inc. Douglas Symons is the President and Chief Executive

Officer of Goran Capital, Inc., as well as the other

aforementioned companies. SIG and its parent a re not required

to be licensed by, and are not regulated by, the Petitioner.

5. The Respondent was acquired by current ownership in

1996 with the consent of the Petitioner. At the time of

acquisition, the Respondent entered into a management agreement

with SIG (identified at that time as GGS/Superior Insurance

Group, Inc.) also with the consent of the Petitioner.

6. According to the Consent Order dated April 30, 1996

(the date of the acquisition), the compensation for services

provided to SIG by the Respondent was not to exceed 32 percent

of gross written premium. The management agreement provided

that the Respondent was to compensate SIG for payment of agent's

commissions (not to exceed 15 percent) and for administrative

services (at the rate of 17 percent of gross written premium).

7. In July 2000, the Petitioner filed a Notice of Intent

to Issue a Cease and Desist Order against the Respondent based

upon the Respondent's practice of forwarding "Finance and

Service Fees" to SIG in addition to the approved compensation

set forth in the management agreement.

8. "Finance and Service Fees" are fees charged by the

Respondent to policyholders who choose to pay premiums by

monthly installments.

9. In January 2001, the Petitioner amended the July 2000

Notice of Intent to include allegations that the Respondent had

filed misleading financial statements with the Petitioner which

were intended to obscure the transfer of the fees to SIG.

10. A formal administrative hearing on the allegations was

conducte d on February 7 and 8, 2001, and a Recommended Order was

entered on June 1, 2001.

11. In the Final Order filed on August 30, 2001, the

Petitioner adopted the Recommended Order's determination that

the financial statements filed by the Respondent had bee n

misleading as to disclosure of the "Finance and Service Fees"

transfer to SIG.

12. In the Final Order, the Petitioner further found that

the payment of "Finance and Service Fees" outside the approved

management agreement "constitutes an immediate hazard to the

policyholders and to the public and demonstrates a lack of

fitness or trustworthiness to engage in the business of

insurance" apparently because the Respondent's surplus had

substantially declined during the period the fees were being

forwarded to SIG.

13. As set forth in the Final Order:

Surplus as to policyholders is the source of

funds used when claims payments exceed

established reserves, or when expenses

otherwise exceed anticipated amounts. The

insurer's surplus is a statutorily mandated

cus hion to assure that insurers have

adequate funds to perform their obligations.

It must be noted, however, that it is not

just the policyholders who have a stake in

making sure the Respondent can pay its

claims, but also all members of the public

who may b ecome involved in an automobile

accident with these policyholders.

14. By Final Order, the Petitioner directed the Respondent

to "immediately cease and desist from making any such payments

until such time as it had filed all required documentation

seekin g, and has received from the Department in writing,

approval for these payments."

15. The Final Order also required that the Respondent

obtain "the immediate repayment of the net amount of

approximately $15 million that was paid from 1997 through 1999,

an d any additional Finance and Service Fees paid thereafter."

In the alternative, the Final Order provided that in lieu of

immediate repayment the Respondent could request Department

approval of a repayment schedule. The Final Order stated that

"[i]f the D epartment determines in its sole discretion that the

repayment schedule is in the best interests of policyholders and

the public, such repayment schedule for the total amount of

Finance and Service Fees that have been paid shall be

implemented by the Respo ndent and the Respondent shall collect

all such amounts from GGS/Superior in accordance therewith."

16. Because the Respondent and SIG were owned and

controlled by the same parties, the Petitioner's Final Order

essentially required that the owners of the Respondent obtain

the repayment of the fees from themselves.

17. On September 28, 2001, the Respondent filed a Notice

of Appeal of the Final Order with the District Court of Appeal,

State of Florida, First District. The filing of the Notice of

Appeal di d not stay the Final Order.

18. Despite the Final Order's prohibition on transfer of

the fees, the Respondent continued to forward the "Finance and

Service Fees" to SIG.

19. On March 4, 2002, the Petitioner filed a Petition to

Enforce Agency Action i n the Leon County Circuit Court, Case

No. 02 - CA - 602, seeking to enforce the prohibition on the fee

forwarding arrangement.

20. On March 14, 2002, the Respondent filed a Motion both

with the Petitioner and with the First District Court seeking to

stay en forcement of the Final Order. On March 20, 2002, the

First District Court denied the request for the stay on the

basis that the Petitioner was the appropriate entity to address

the request.

21. On April 5, 2002, the Petitioner entered an Order

Conditiona lly Granting Stay Pending Appeal, granting a stay as

to the repayment of the $15 million and requiring in lieu

thereof, that the Respondent post a $15 million bond. The

Petitioner's Order denied the Respondent's request to stay the

Final Order's prohibiti on against forwarding "Finance and

Service Fees" to SIG.

22. The Respondent filed an appeal of the Order

Conditionally Granting Stay Pending Appeal with the First

District Court on May 6, 2002. By Order of June 19, 2002, the

First District Court issued an Order vacating the obligation to

post a $15 million bond. The First District Court's Order did

not modify the Petitioner's denial of the Respondent's request

for stay regarding the prohibited payment of "Finance and

Service Fees" to SIG.

23. The Dist rict Court of Appeal affirmed the Petitioner's

Final Order by per curium opinion entered on September 26, 2002.

The Respondent discontinued the practice of forwarding "Finance

and Service Fees" to SIG at that time.

24. From September 2001 through Septe mber 2002 (the period

of time between issuance and affirmation of the Final Order, the

Respondent forwarded to SIG a net total of $4,442,079 in

"Finance and Service Fees" in direct contravention of the Final

Order. The net total reflects gross fees of $8, 392,079 with an

offset allowed for capital contributions and retained management

fees totaling $3,950,000.

25. As of the May 2003 administrative hearing, the

Respondent had not obtained repayment from SIG of the

approximately $15 million that was paid f rom 1997 through 1999.

26. The Respondent's sole apparent attempt to obtain

repayment of the $15 million was a letter dated October 21,

2002, from Ginger Darrough (Controller and Treasurer for the

Respondent) to Douglas Symons as President of SIG demand ing

repayment of the $15 million.

27. Ms. Darrough is the Treasurer of SIG. As stated

herein, Mr. Symons is the President/CEO of the Respondent.

28. In response to the Darrough letter, Mr. Symons

proposed a repayment plan by letter dated October 31, 2002. The

repayment schedule proposed by the Respondent was to repay

installments of one million dollars on January 1, 2003, on

October 1, 2003, on April 1, 2004, and on October 1, 2004,

followed by the "balance as agreed" on April 1, 2005.

29. The Depa rtment determined that the proposed repayment

schedule was not acceptable. The evidence fails to establish

that the Department's rejection of the proposed repayment plan

was inappropriate.

30. The evidence establishes that as of the May 2003

administra tive hearing, the Respondent is unable to meet the

repayment schedule it proposed in the October 31 letter.

31. The Final Order required that in addition to the $15

million, the Respondent obtain repayment of "Finance and Service

Fees" forwarded by the Respondent for subsequent periods.

32. For years 2000 through 2002, the Respondent forwarded

net "Finance and Service Fees" totaling $18,467,418 to SIG. The

net total reflects gross "Finance and Service Fees" forwarded to

SIG totaling $26,318,081 for the three - year period (including

$10,981,082 in calendar year 2000, $9,937,400 in calendar year

2001, and $5,399,536 in calendar year 2002) and credits the

Respondent for $5,500,600 in paid - in capital (2001) and retained

management fees of $950,000 (2001) and $1,350,000 (2002).

33. The Respondent has not obtained repayment of the

additional "Finance and Service Fees" paid between 2000 and

2002.

34. The net "Finance and Service Fees" improperly

forwarded between 1997 and 2002 by the Respondent to SIG tota l

$33,467,418.

35. During the time the fees have been forwarded by the

Petitioner to the parent company, the Petitioner suffered a

precipitous decline in surplus. The Respondent had a surplus of

approximately $57 million at the end of 1998. By the end o f

2002, the surplus had declined to approximately $10 million.

36. The Respondent asserts that discussions and

correspondence with the Petitioner regarding compliance with the

requirements of the Final Order suggested that a resolution

outside the terms of the Final Order was possible and supports

the Respondent's lack of compliance. The evidence fails to

support the assertion.

CONCLUSIONS OF LAW

37. The Division of Administrative Hearings has

jurisdiction over the parties to and subject matter of this

proceeding. Section 120.57(1), Florida Statutes.

38. Because the Petitioner is seeking to suspend or revoke

the Certificate of Authority of the Respondent to conduct

business in Florida, the Petitioner has the burden of

establishing by clear and convin cing evidence the allegations

against the Respondent. Department of Banking and Finance v.

Osborne Stern & Co. , 670 So. 2d 932 (Fla. 1996); Ferris v.

Turlington , 510 So. 2d 292 (Fla. 1987).

39. In this case, the evidence clearly and convincingly

establis hes that the Respondent failed to comply with a lawful

Final Order of the Petitioner by failing to immediately cease

forwarding "Finance and Service Fees" as required by the Final

Order issued on August 30, 2001. The requirement that such fee

transfers im mediately cease was never stayed or postponed in any

manner by any action of the Petitioner or appellate court.

Although the Respondent asserts that they believed the transfers

could continue while the Final Order was appealed, there is no

credible eviden ce to support the assertion.

40. The evidence further clearly and convincingly

establishes that the Respondent has failed to obtain repayment

of $15,000,000 in improperly forwarded "Finance and Service

Fees" as required by the Final Order. The evidence f ails to

establish that the Respondent has made any credible effort to

obtain the funds from the parent company. The October 21, 2002,

letter (written after the Final Order had been affirmed by the

appellate court) from Ms. Darrough to Mr. Symons (her empl oyer

and owner of both companies) is insufficient to establish that

there was any legitimate effort on the part of the Respondent to

comply with the repayment requirements of the Final Order.

41. As set forth in the Notice and Order to Show Cause,

Secti on 624.418, Florida Statutes, in relevant part provides as

follows:

624.418 Suspension, revocation of

certificate of authority for violations and

special grounds. --

(1) The department shall suspend or revoke

an insurer's certificate of authority if it

finds that the insurer:

* * *

(b) Is using such methods and practices in

the conduct of its business as to render its

further transaction of insurance in this

state hazardous or injurious to its

policyholders or to the public.

* * *

(d) No longer meets the requirements for the

authority originally granted.

(2) The department may, in its discretion,

suspend or revoke the certificate of

authority of an insurer if it finds that the

insurer:

(a) Has violated any lawful order or rule of

the department or any provision of this code.

42. In the Petitioner's Proposed Recommended Order, the

Petitioner asserts that the Respondent's failure to comply with

the Final Order requires suspension or revocation of the

Respondent's Certificate of Authori ty under Section

624.418(1)(b), Florida Statutes, because it "is using such

methods and practices in the conduct of its business as to

render its further transaction of insurance in this state

hazardous or injurious to its policyholders or to the public."

43. The failure of an insurer to comply with an order

issued by the Petitioner is specifically addressed at Section

624.418(2)(a), Florida Statutes. The cited Section does not

require that the insurer's Certificate of Authority must be

suspended or rev oked, but provides that such penalty may be

imposed at the discretion of the Petitioner. In this case,

given the continuing failure of the Respondent to comply with

the Final Order entered by the Petitioner as set forth herein,

the Department's exercise o f that discretion is warranted.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is

RECOMMENDED that the Department of Financial Services,

Office of Insurance Regulation enter a Final Order suspending the

Respondent's Cert ificate of Authority to transact business in the

State of Florida.

DONE AND ENTERED this 6th day of August, 2003, in

Tallahassee, Leon County, Florida.

S

WILLIAM F. QUATTLEBAUM

Administrative Law Judge

Division of Admin istrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675 SUNCOM 278 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 6th day of August, 2003.

COPIES FURNISHED :

James S. Grodin, Esquire

Foley & Lardner

111 North Orange Avenue, Suite 1800

Orlando, Florida 32801 - 2386

Elenita Gomez, Esquire

Department of Financial Services

Office of Insurance Regulation

612 Larson Building

200 E ast Gaines Street

Tallahassee, Florida 32399 - 0333

S. Marc Herskovitz, Esquire

Department of Financial Services

Office of Insurance Regulation

612 Larson Building

200 East Gaines Street

Tallahassee, Florida 32399 - 0333

N. Wes Strickland, Esquire

Foley & Lardner

106 East College Avenue, Suite 900

Tallahassee, Florida 32301

Honorable Tom Gallagher, Chief Financial Officer

Department of Financial Services

The Capitol, Plaza Level 11

Tallahassee, Florida 32399 - 0300

Mark Casteel, General Counsel

Departm ent of Financial Services

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

t o this Recommended Order should be filed with the agency that

will issue the Final Order in this case.