03-002886 N.C.M. Of Collier County, Inc. vs. Department Of Financial Services Status: Closed Recommended Order on Thursday, February 26, 2004.

Summary: Respondent is required to accept Association`s recommendation of denial where there is no clear and convincing evidence that the recommendation was erroneous.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

N.C.M. OF COLLIER COUNTY, INC., )

)

Petitioner, )

)

vs. ) Case No. 03 - 2886

)

DEPARTMENT OF FINANCIAL )

SERVICES, )

)

Respondent. )

)

RECOMMENDED OR DER

Pursuant to notice, a formal hearing was held in this case

on November 14, 2003, in Tallahassee, Florida, before Carolyn S.

Holifield, a duly - designated Administrative Law Judge of the

Division of Administrative Hearings.

APPEARANCES

For Petitioner: Mark B. Cohn, Esquire

McCarthy, Lebit, Crystal

& Liffman Co., L.P.A.

1800 Midland Building

101 West Prospect Avenue

Cleveland, Ohio 44115 - 1088

For Respondent: John M. Alford, Esquire

542 East Park Avenue

Tallahassee, Florida 32301

Cynthia A. Shaw, Esquire

Department of Financial Services

200 East Gaines Street

Tallahassee, Florida 32399 - 4229

STATEMENT OF THE ISSUE

The issue in this case is whether Petitioner's application

for self - insurance for workers' compensation should be approved.

PRELIMINARY STATEMENT

Petitioner, N.C.M. of Collier County, Inc. (Petitioner,

N.C.M., or Company), applied for self - insurance status for

purposes of workers' compensation in the State of Florida. By

letter dated June 30, 2003, Respondent, the Department of

Financial Services (Department), denied the application. N.C.M.

challenged the decision and filed a Petition for Hearing,

seeking review of the denial. The matter was forwarded to the

Division of Administrative Hearings for assignment of an

Administrative Law Judge to conduct the hearing and prepare a

recommend ed order.

At hearing, Petitioner called five witnesses: Brian Gee,

executive director of the Florida Self - Insurers Guaranty

Association, Inc.; Susan Christopher, C.P.A. for Rust and

Christopher; Shawn Fuentes, chief financial officer for N.C.M.;

Michael D elDuca, president of N.C.M.; and Gary Gann, private

investigator. Petitioner offered and had nine exhibits received

into evidence, including the deposition of Jenny Spencer, audit

director for Sharpton, Brunson, and Company. The Department

presented the testimony of Cynthia Shaw, assistant general

counsel for the Department of Financial Services, Legal

Division, and Brian Gee. Respondent offered no exhibits into

evidence.

A Transcript of the proceeding was filed on December 3,

2003. At the conclusion of the hearing, the parties agreed to

file proposed recommended orders ten days after the transcript

was filed. Both parties filed Proposed Recommended Orders,

which have been considered in preparation of this Recommended

Order.

FINDINGS OF FACT

Based upon the observation of the witnesses' testimony and

the documentary evidence received into evidence, the following

relevant and material facts that follow are determined.

1. The Florida Self - Insurers Guaranty Association, Inc.

(Association), is established b y Section 440.385, Florida

Statutes (2003), and is an organization that provides a

guarantee for workers' compensation benefits for companies that

are self - insured. The Association pays injured workers their

benefits, if the self - insurer becomes insolvent .

2. An insolvency fund is established and managed by the

Association, which funds the workers' compensation benefits for

insolvent members. The insolvency fund is funded by assessments

from members of the Association.

3. Pursuant to Florida Administrat ive Code Rule 69L - 5.102

(formerly Florida Administrative Code Rule 4L - 5.102), in order

for an employer to qualify for self - insurance under the relevant

provisions of law, the applicant must meet the following

requirements: (1) have and maintain a minimum net worth of

$1,000,000; (2) have at least three years of financial

statements or summaries; (3) if the name of the business has

changed in the last three years, provide a copy of the Amended

Articles of Incorporation; and (4) have the financial strength

t o ensure the payment of current and estimated future

compensation claims when due, as determined through review of

their financial statement or summary by the Department.

4. Of the general requirements noted in paragraph 3,

above, the only issue in this p roceeding regards N.C.M.'s

financial strength.

5. An applicant for self - insurance is required to submit

in its application audited financial statements for its three

most recent years. All financial statements, audits, and other

financial information mus t be prepared in accordance with

Generally Accepted Accounting Principles. The Association is

required to review each application and the financial documents

which are submitted as part of that application to determine if

the applicant has the financial s trength to ensure the timely

payment of all current and future workers' compensation claims.

6. After the Association reviews the application, it makes

a recommendation to the Department as to whether the application

for self - insurance should be approved or denied.

7. The Department is required by law to accept the

Association's recommendations unless it finds that the

recommendations are clearly and convincingly erroneous.

8. N.C.M. submitted its application for self - insurance on

or about May 6, 2003, a nd included in its application audited

financial statements for its three most recent fiscal years.

The statement contained an unqualified opinion from N.C.M.'s

accountant.

9. N.C.M. provided information in its application

regarding the number of employe es, the worker classifications of

these employees, and a payroll classification rating that has

been established by the National Council on Compensation

Insurance. The application made it clear that the Department

could use this information to calculate a manual annual rate

premium for each worker classification to determine an overall

workers' compensation premium based on statewide manual rates.

The Association calculated a standard premium of $507,088.75 for

N.C.M., after giving credit for its experien ce modification

of .71.

10. N.C.M. confirmed in its application that it was a

corporation duly organized and existing in the State of Florida.

N.C.M. also supplied information on its corporate officers and

copies of its Articles of Incorporation confirmin g its corporate

existence.

11. In its application and at the hearing, N.C.M. agreed

that, if accepted for membership, it will maintain security

deposits and excess insurance as required by the Department's

administrative rules.

12. Upon receipt of N.C.M.' s application, the Association

thoroughly reviewed the application and financial statements for

the three most recent years. The Association examined the

balance sheets to analyze the Company's assets, liabilities,

working capital, and equity structure. Additionally, the

Association examined N.C.M.'s income statements to analyze the

Company's revenues, profits and/or losses, and expenses. The

Company's cash flows were examined. The Association calculated

various financial ratios for N.C.M. in order to e xamine, among

other things, the company's asset structure, liquidity, total

debt to equity structure, and net income or loss as it relates

to the company's equity.

13. The analysis and review performed by the Association,

as described in paragraph 12, is t he same type of analysis the

Association performs on every applicant for self - insurance.

14. Because applicants for self - insurance come from

various types of industries, it is not useful to establish

specific threshold values for various financial ratios in

determining financial strength. However, the Association

reviews and analyzes the financial statements of each applicant

to determine the financial condition of that applicant.

15. The Association's review of N.C.M.'s audited financial

statements revea led that the Company had a net loss of $60,937

in the year ending December 31, 2002. The Company also had a

loss from operations in its most recent year in the amount of

$74,897, or negative .62 of its revenues. This was a

significant factor to the Assoc iation because it revealed

N.C.M.'s lack of profitability for its most recent year.

16. Petitioner's tax return of 2002 showed a profit for

the Company. However, the tax returns are not meant to reflect

the economic profit of a business and are not prepar ed in

accordance with Generally Accepted Accounting Principles.

Rather, the audited financial statements provide more accurate

information about the Company’s financial health.

17. N.C.M.'s 2002 net worth was $1,218,895, which exceeded

the $1,000,000 mini mum net worth requirement established in the

applicable rule cited in paragraph 3 above. However, the

Association was concerned about N.C.M.'s net worth when taken as

a percentage of its workers' compensation premiums, calculated

by using the payroll clas sification information in N.C.M.'s

application. The analysis of N.C.M.'s net worth as a percentage

of workers' compensation premiums is important because workers'

compensation claims can accrue each year and be paid out over a

long period of time by the s elf - insurer. A company with equity

that is relatively low in comparison to its workers'

compensation exposure might, over time, owe its injured workers

as much as, or more than, the equity in the company. This would

increase the risk for the injured worke r.

18. Upon completing its financial analysis, the

Association recommended that N.C.M.'s application for self -

insurance be denied. Brian Gee, the executive director of the

Association, conveyed the recommendation of denial to the

Department in two letters , one dated May 12, 2003, and the other

one dated June 19, 2003. The letters were virtually identical,

except that the June 19, 2003, letter referred to the specific

statute at issue and statutory language that N.C.M. did not have

the financial strength n ecessary to ensure timely payment of all

current and future claims.

19. Attached to both the May 12, 2003, and June 19, 2003,

letters was a copy of the Association's summary of N.C.M.'s

audited financial statements for the years ended December 31,

2002, 20 01, and 2000. Based on the review of the financial data,

the Association made the following four findings, which it

listed in both letters:

1. The Company received unqualified audit

opinions on its December 31, 2002, 2001, and

2000 financial statements fr om Rust &

Christopher, P.A.

2. Liquidity - The current ratio has

decreased from 1.34 at December 31, 2000 to

1.13 at December 31, 2002.

3. Capital Structure - The total

liabilities to book equity ratio has

increased since December 31, 2000 from 1.39

to 1.99 at December 31, 2002.

4. Results of Operations - The Company's

gross profit margin has negative 0.62 for

the year ended December 31, 2002. The

Company reported a net loss of $60,937 for

the year ended December 31, 2002.

20. Although the above - re ferenced letters listed findings

relative to the Company's liquidity and capital structure,

Mr. Gee did not believe that those findings were of "major

significance."

21. The Association's letters and accompanying financial

data were submitted to the Depar tment for a final decision to be

made by the Department.

22. The Department received and reviewed the Association's

letters of recommendation and the accompanying documentation.

Based on its review of the letter, the Department noted that the

Association appeared to have concerns about the Company's

liquidity, liabilities, and profitability. However, there was

nothing in the letters which indicated that the Association did

not consider the findings related to the Company's liquidity and

liabilities (capit al structure) to be of major significance.

23. The Department sent N.C.M.'s application, which

included the financial statements, to an outside CPA firm for

review. The outside CPA performed a financial analysis,

calculated various financial ratios on N. C.M., and provided a

report to the Department.

24. The outside CPA correctly noted in her report that

N.C.M.'s gross profit margin for the year ended December 31,

2002, was 15.4 percent.

25. In Finding No. 4 of its letters of recommendation to

the Departme nt, the Association had mistakenly mislabeled the

Company's net profit margin as the gross profit margin. As a

result of that mislabeling in the letters, the finding

incorrectly stated that N.C.M.'s gross profit margin was a

negative 0.62 percent for the year ending December 31, 2002. In

fact, it was the Company's net profit margin for the year ending

December 31, 2001, that was negative 0.62 percent.

Notwithstanding the incorrect mislabeling of this item in the

letters, the financial summary attached to the letters

accurately reflected the Company's gross profits and revenue.

26. The financial statement of N.C.M. also reflected that

for the year ending 2002, the Company had a gross profit of

$1,877,076, and for that same period had a loss from operations

of $74,897, or negative .62 percent.

27. The outside CPA also compared various financial

information on N.C.M. to an industry average and concluded that

"some of the Company's ratios are below the industry ratios."

In making these comparisons, the outsid e CPA researched two

companies she believed were in a business similar to N.C.M. The

research on these companies provided an industry average for

various financial information on companies in the same industry

as the two reference companies. In this case , the two reference

companies were primarily producers or sellers of concrete

products, as opposed to construction companies like N.C.M.

Accordingly, the industry ratios contained in the outside CPA's

report may be different than the construction industry and not

an appropriate basis with which to compare N.C.M.

28. The report of the outside CPA stated that N.C.M. pays

approximately $1,000,000 a year in workers' compensation

insurance. That figure is higher than the premiums calculated

by the Association using statewide manual rates. Instead of

using those rates, the outside CPA based her figure on a

newspaper article, which stated that Mr. DelDuca, president of

N.C.M., pays $1,000,000 for workers' compensation insurance.

29. In her report, the outside CP A cited N.C.M.'s lack of

profitability for the year ending 2002 and correctly noted that

for that year, the Company reported a net loss of $60,937.

30. The outside CPA notified the Department that she

concurred with the Association's recommendation to de ny N.C.M.'s

application to become self - insured because the Company had not

demonstrated it has the financial strength to ensure timely

payment of workers' compensation claims.

31. The Department reviewed the outside CPA's report and

noted the concerns abo ut the company's debt equity and lack of

profitability. Based on the outside CPA's report, the

Department correctly determined that the report contained no

information that the Association's recommendation was clearly

and convincingly erroneous.

32. As a result of its determination that the

Association's recommendation to deny N.C.M.'s application for

self - insurance was not clearly or convincingly erroneous, the

Department denied the application.

CONCLUSIONS OF LAW

33. The Division of Administrative Hear ings has

jurisdiction of the parties to and the subject matter of this

proceeding. §§ 120.569 and 120.57(1), Fla. Stat. (2003).

34. The Florida Self - Insurers Guaranty Association, Inc.,

is a nonprofit corporation created by Section 440.385(1)(a),

Florida Statutes (2003). Pursuant to that provision, "all

individual self - insurers as defined in ss. 440.02(23)(a) and

440.38(1)(b) . . . shall be members of the [A]ssociation as a

condition of their authority to individually self - insure in this

state."

35. The Association is required to create an Insolvency

Fund for the purposes of meeting the obligations of insolvent

members of the Association and after the exhaustion of any

security deposit. § 440.385(4)(a), Fla. Stat. (2003).

36. An applicant for self - insu rance for workers'

compensation must provide proof that it meets the minimum

eligibility requirements established in applicable statutes and

rules. Section 440.38(1)(b), Florida Statutes (2003), requires

that an applicant for self - insurance provide proof to the

Association that it "has the financial strength necessary to

ensure timely payment of all current and future claims."

37. With regard to minimum requirements for self -

insurance, Florida Administrative Code Rule 69L - 5.102(2),

provides in relevant pa rt the following:

(2) All other individual employers not

eligible under section (1) shall qualify for

self - insurance under Section 440.38(1)(b),

Florida Statutes, and must meet the

following minimum requirements :

(a) Have and maintain a minimum net wort h

of $1,000,000 U.S.

(b) Have at least three (3) years’

financial statements or summaries in the

name of the applicant. If financial

statements or financial summaries are

prepared on a comparative basis, such

statements shall be the most recent fiscal

ye ar ending statement and the preceding

fiscal year ending statement. If latest

financial statement is over six (6) months

old at time of application, an interim

statement up to, and including, their latest

fiscal quarter must be included and must be

certif ied by a corporate officer.

(c) If the name of the business has changed

in the last three years, provide a copy of

the Amended Articles of Incorporation.

(d) Have the financial strength to ensure

the payment of current and estimated future

compensation claims when due, as determined

through review of their financial statement

or summary by the division . . . . (Emphasis

supplied.)

38. The Association is statutorily charged with reviewing

applications for self - insurance to determine if the applican t

meets the minimum requirements, including whether the applicant

"has the financial strength to ensure timely payment of all

current and future compensation claims. . . ." § 440.38(1)(b),

Fla. Stat. (2003). Upon such determination, the Association is

re quired to make recommendations on the applications to the

Department. The Association's role in reviewing applications

and recommending applicants for membership and the Department's

role in approving or disapproving applications are delineated in

Section 440.385(3)(b)6., Florida Statutes (2003). That section

provides in relevant part the following:

(b) The [A]ssociation may:

* * *

6. Review all applications for membership

in the [A]ssociation to determine whether

the applicant is qualified for member ship

under the law. The [A]ssociation shall

recommend to the [D]epartment that the

application be accepted or rejected based on

the criteria set forth in s.440.38(1)(b).

The [D]epartment shall approve or disapprove

the application as provided in paragraph

(6)(a).

39. Section 440.38(1)(b), Florida Statutes (2003),

provides the standard to which the Department must adhere in

acting on the Association's recommendations. That section

provides in relevant part the following:

The [A]ssociation shall review the financial

strength of applicants for membership,

current members, and former members and make

recommendations to the [D]epartment

regarding their qualifications to self -

insure in accordance with this section and

ss. 440.385 and 440.386. The [D]epartment

shall act in accordance with the

recommendations unless it finds by clear and

convincing evidence that the recommendations

are erroneous. (Emphasis supplied.)

40. The evidence established that the Association

performed a thorough review and analysis of the financial

information submitted in N.C.M.'s application in order to

determine the Company's financial strength. The evidence also

established that the documents relied upon by the Association in

making its determination and recommendation were the aud ited

financial statements of N.C.M. and financial information for the

past three years, all of which was prepared in accordance with

Generally Accepted Accounting Principles.

41. The e vidence established that the one of the main

reason's that the Associati on recommended denial of N.C.M.'s was

the Company's lack of profitability. It is undisputed that

N.C.M incurred a net loss in 2002 of $60,937 and that its loss

from operations for that year was $74,897.

42. At hearing, Petitioner, a corporation, attempte d to

offset the losses reflected on its income statements by arguing

that if N.C.M. were a different type of entity ( i.e. , a sole

proprietorship or limited liability company), its profitability

might have been different because Mr. DelDuca's salary of

$546 ,195 might be reflected differently on financial statements.

Also, Petitioner asserted that its income tax return, which

showed a profit, should be considered, notwithstanding that the

returns are not meant to reflect the economic profit of a

business and are not prepared in accordance with Generally

Accepted Accounting Principles. These and other assertions and

arguments made by Petitioner are unconvincing.

43. Here, the Department appropriately accepted the

Association's recommendation to deny N.C.M.'s application for

self - insurance, since there was no "clear and convincing

evidence" that the Association's recommendation was erroneous.

RECOMMENDATION

Based upon the foregoing Findings of Fact and Conclusions

of Law, it is

RECOMMENDED that the Departmen t issue a final order denying

N.C.M. of Collier County, Inc.'s application for self - insurance.

DONE AND ENTERED this 26th day of February, 2004, in

Tallahassee, Leon County, Florida.

S

CAROLYN S. HOLIFIELD

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675 SUNCOM 278 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrati ve Hearings

this 26th day of February, 2004.

COPIES FURNISHED :

John M. Alford, Esquire

542 East Park Avenue

Tallahassee, Florida 32301

Cynthia A. Shaw, Esquire

Department of Financial Services

200 East Gaines Street

Tallahassee, Florida 32399 - 4229

M ark B. Cohn, Esquire

McCarthy, Lebit, Crystal

& Liffman Co., L.P.A.

1800 Midland Building

101 West Prospect Avenue

Cleveland, Ohio 44115 - 1088

Honorable Tom Gallagher

Chief Financial Officer

Department of Financial Services

The Capitol, Plaza Level 11

Tallahassee, Florida 32399 - 0300

Mark Casteel, General Counsel

Department 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 wi thin

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.