06-004456 First American Title Insurance Company vs. Office Of Insurance Regulation Status: Closed Recommended Order on Tuesday, July 3, 2007.

Summary: Petitioner`s Uniform Commercial Code Insurance Policy and Endorsements do not provide for the "existence" of a security interest as required by Section 624.608(2), Florida Statutes, and should be disapproved.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

FIRST AMERICAN TITLE INSURANCE ) )

COMPANY, )

)

Petitioner, )

) Case No. 06-4456

vs. )

)

OFFICE OF INSURANCE REGULATION, )

)

Respondent. )

RECOMMENDED ORDER

Pursuant to notice, a formal hearing was conducted in this

case on April 4, 2007, in Tallahassee, Florida, before Robert S.

Cohen, a duly-designated Administrative Law Judge of the Division

of Administrative Hearings.

APPEARANCES

For Petitioner: Richard J. Santurri, Esquire

Wendy Russell Wiener, Esquire

Mang Law Firm, P.A.

Post Office Box 11127

Tallahassee, Florida 32399-0333

For Respondent: Jeffrey W. Joseph, Esquire

Office of Insurance Regulation

612 Larson Building

200 East Gaines Street

Tallahassee, Florida 32399-4260

STATEMENT OF THE ISSUE

Whether First American Title Insurance Company's ("First

American" or "Petitioner") five Uniform Commercial Code policy

forms and 17 endorsements, Filing Number 05-07521, should be

approved.

PRELIMINARY STATEMENT

During the 2005 Legislative Session, the Florida Legislature

approved HB 75, which amended Section 624.608, Florida Statutes,

broadening the definition of title insurance. This amendment

authorized licensed title insurers to write Uniform Commercial

Code ("UCC") policies covering security interests in personal

property. Subsection 624.608(2), Florida Statutes, provides that

title insurance is insurance of owners and secured parties of

"the existence, attachment, perfection, and priority of a Uniform

Commercial Code Security Interest." On June 24, 2005, First

American made a Form Filing with the Office of Insurance

Regulation ("OIR" or "Respondent") identified as FCC 05-07521, in

which First American sought the approval of five forms and 17

endorsements for use in Florida. On August 24, 2006, OIR issued

a letter disapproving filing FCC 05-07521. On October 23, 2006,

First American filed its First Amended Petition for a Section

120.57(1), Florida Statutes, Formal Administrative Hearing. On

March 30, 2007, First American filed Petitioner's Prehearing

Statement, in which it indicated it was only challenging OIR's

denial of the Eagle 9® UCC Insurance Policy for Lenders and the

associated endorsements.

At the hearing, Petitioner presented the testimony of Peter

Rice and James Prendergast, and offered Exhibits 1 through 9

and 11, all of which were admitted into evidence. Respondent

presented the testimony of Steven H. Parton, Esquire, and offered

Exhibits 1 through 8, all of which were admitted into evidence.

The parties ordered a transcript of the proceedings, and

agreed to submit their proposed recommended orders on May 25,

2007. The parties' submittals were timely made on that date.

References to statutes are to Florida Statutes (2006) unless

otherwise noted.

FINDINGS OF FACT

1. OIR is an agency of the State of Florida charged with

licensing and regulating certain businesses and professions,

including the regulation of title insurance.

2. First American is a company duly-authorized by OIR to

engage in the business of title insurance in the State of

Florida.

3. During the 2005 Legislative Session, the Florida

Legislature approved HB 75, which amended Section 624.608,

Florida Statutes, broadening the definition of title insurance.

Subsection 624.608(2), Florida Statutes, provides that title

insurance is insurance of owners and secured parties of "the

existence, attachment, perfection, and priority of security

interests in personal property under the Uniform Commercial

Code."

4. On June 24, 2005, First American made a form filing with

OIR identified as FCC 05-07521.

5. In FCC 05-07521, First American sought the approval of

five forms and 17 endorsements for use in Florida. The five

forms are: The EAGLE 9® The Insured Search; the EAGLE 9® The

Insured Filing™; the EAGLE 9® UCC Insurance Policy for Lenders;

the EAGLE 9® UCC Insurance Policy for Buyers; and the EAGLE 9®

Insurance Vacation Interest Policy. The 17 endorsements are:

the Sellers Lien Endorsement, the Tax Lien Endorsement, the

Renewal Endorsement, the Tracking Endorsement, the Lender's

Aggregation Endorsement, the Mezzanine Endorsement, the Pledged

Equity Endorsement, the Change of Name of Insured Endorsement,

the Waiver of Attorney Subrogation Rights Endorsement, the

Springing Control Endorsement, the Post Policy Tax Lien

Endorsement, the Endorsement for Issuance of Post Policy Date

Judgment Lien Endorsement, the Borrower's Status Endorsement, the

Buyers Aggregation Endorsement, the Increase In Tax Lien Coverage

Endorsement, the Buyer's Equity Ownership Endorsement, and the

Amendment to Buyers Policy Insuring Clause Coverage Limitation

Endorsement.

6. On February 28, 2006, Peter Rice from OIR sent a letter

to James Predergast of First American regarding Filing FCC 05-

07521.

7. On April 4, 2006, James Prendergast sent a letter to

Peter Rice in response to the February 28, 2006, letter, asking

OIR for a clarification on the meaning of "existence" as the term

is used in Subsection 624.608(2), Florida Statutes. OIR did not

specifically respond to this letter.

8. On August 24, 2006, Peter Rice sent a letter to Douglas

A. Mang, Esquire, disapproving Filing FCC 05-07521. That letter

set forth the reasons for OIR's disapproval of the proposed

forms.

9. The August 24, 2006 letter stated that the filing was

denied for the following reasons:

a) The forms violate the intent and meaning

of Section 624.608(2), Florida Statutes,

which requires that title insurance provide

coverage for the existence, attachment,

perfection, and priority of security

interests in personal property under the

Uniform Commercial Code;

b) The forms violate the intent and meaning

of Section 627.7485(1), Florida Statutes,

which stipulates that a title insurer may not

issue a title insurance commitment,

endorsement, or title insurance policy until

the title insurer has caused to be conducted

a reasonable search and examination of the

title or the records of the Uniform

Commercial Code filing office, as applicable,

has examined such other information as may be

necessary, and has caused to be made a

determination of the existence, attachment,

perfection, and priority of a Uniform

Commercial Code security interest, including

endorsement coverages, with sound

underwriting practices; and

c) Since the forms do not comply with the

meaning and intent of Sections 624.608(2) and

627.7485(1), Florida Statutes, the forms do

not meet the definition of title insurance

and, therefore, their issuance by First

American Title Insurance Company would

violate the meaning and intent of Section

627.786(1), Florida Statutes.

10. First American does not contest OIR's disapproval of

the EAGLE 9® The Insured Search, the EAGLE 9® The Insured Filing,

the EAGLE 9® UCC Insurance Policy for Buyers, and the EAGLE 9®

Insurance Vacation Interest Policy.

11. The EAGLE 9® UCC Insurance Policy for Lenders was not

approved because OIR concluded that the policy did not cover

"existence."

12. The policy form does not specifically insure for the

"existence" of a security interest, nor does it contain the term

"existence."

13. OIR has no agency rules interpreting Subsection

624.608(2), Florida Statutes.

14. "Existence" is not defined under Florida law.

15. The four policy form disapprovals Petitioner chose not

to contest at the hearing, the UCC Insurance Policy for Buyers,

the UCC Insurance Vacation Interest Policy, the UCC Search

Insurance Policy, and the UCC Filing Insurance Policy, each

specifically insures for the "existence" of a security interest

under the "Covered Risks" section of those proposed policies.

16. If the term "existence" appeared in the appropriate

insuring agreement for EAGLE 9® UCC Insurance Policy for Lenders,

the policy would have met the statutory requirement for approval.

17. If the EAGLE 9® UCC Insurance Policy for Lenders was

approved, the Sellers Lien Endorsement would have been approved

if a page number was added to the form.

18. If the EAGLE 9® UCC Insurance Policy for Lenders was

approved, the Tax Lien Endorsement would have been approved if a

page number was added to the form.

19. If the EAGLE 9® UCC Insurance Policy for Lenders was

approved, the Tracking Endorsement would have been approved if a

page number was added to the form and a premium set.

20. If the EAGLE 9® UCC Insurance Policy for Lenders was

approved, the Lenders Aggregation Endorsement would have been

approved if a page number was added to the form.

21. If the EAGLE 9® UCC Insurance Policy for Lenders was

approved, the Mezzanine Endorsement would not have been approved,

because OIR concluded that such coverage does not require the

search of UCC filing office records.

22. If the EAGLE 9® UCC Insurance Policy for Lenders was

approved, the Pledged Equity Endorsement would not have been

approved, because OIR concluded that such coverage does not

require the search of UCC filing office records.

23. If the EAGLE 9® UCC Insurance Policy for Lenders was

approved, the Change of Name of Insured Endorsement would have

been approved if a page number was added to the form.

24. If the EAGLE 9® UCC Insurance Policy for Lenders was

approved, the Waiver of Attorney Subrogation Rights Endorsement

would have been approved if a page number was added to the form.

25. If the EAGLE 9® UCC Insurance Policy for Lenders was

approved, the Springing Control Endorsement would not have been

approved, because OIR concluded that such coverage does not

require the search of UCC filing office records.

26. If the EAGLE 9® UCC Insurance Policy for Lenders was

approved, the Post Policy Tax Lien Endorsement would have been

approved if a page number was added to the form.

27. If the EAGLE 9® UCC Insurance Policy for Lenders was

approved, the Post Policy Date Judgment Lienholders Endorsement

would have been approved if an exhibit, which was not included in

the original submission, was approvable and if a rate was set for

the endorsement.

28. If the EAGLE 9® UCC Insurance Policy for Lenders was

approved, the Borrower's Status Endorsement would have been

approved if a page number was added to the form.

29. Unlike traditional title insurance where priority is

obtained by filing, some transactions under the UCC obtain

priority by possession or control of the collateral.

30. To create a security interest in a general intangible

such as a patent or contract, a security interest may only be

perfected by the filing of a security agreement with the

appropriate UCC filing office.

31. A security interest in inventory can be created by

filing with the appropriate UCC filing office or by taking

possession of the inventory.

32. A security interest in a depository account can be

perfected by entering into a control agreement with the

depository institution. Such an interest cannot be perfected by

filing or possession.

33. Mezzanine lending is a specialized form of financing

that fills the gap between the loan to value restrictions of a

lender and the ultimate cost of the item being purchased.

Typically, the subjects of such financing are large, highly-

expensive buildings. Mezzanine financing involves the creation

of a limited liability corporation (LLC) that holds as its

primary asset a 100 percent interest in the building being

purchased. The mezzanine lender extends credit to the partners

or other equity owners of the LLC, with the lender taking a

pledge of the parties' equity interests in the LLC. This allows

the purchasers to borrow the full purchase price of a building.

Since the purchasers are pledging their interest in the LLC and

not specifically in collateral, the first mortgage holder avoids

any prohibition against pledging the collateral for a second

mortgage or additional financing.

34. Many lenders as well as Moody's, a rating agency, now

expect to see UCC insurance in all such transactions, which are

also known as CMBS (collateralized mortgage-backed securities)

transactions.

35. In mezzanine lending a security interest is perfected

by possession or control of the certificated or un-certificated

securities of the LLC.

36. No centralized UCC filing office exists that would

allow a title insurer or lender to make a reasonable search and

examination to discover an existing security interest that was

perfected by possession or control.

37. First American currently sells the UCC EAGLE 9® Lenders

Policy in all 50 states and an analogous product in Canada.

38. The coverage offered in the UCC EAGLE 9® Lenders Policy

is currently being written by First American in about half the

states as a property and casualty product and in the other half

as a title insurance product.

39. First American believes it could currently write the

policy at issue as a property and casualty product in Florida.

40. The current industry practice is to write this product

out of a Delaware LLC.

41. UCC title insurance is typically written by attorneys

who are exempt from licensure as a title insurance agent. If

this product is written through a property and casualty company,

attorneys will not be eligible to receive a commission unless

they are properly licensed through Respondent as property and

casualty insurance agents.

42. First American is primarily a database company that

insures the accuracy of its search of databases and the results

of the search.

43. No mezzanine lender would use a form that includes the

term "existence" in the insuring clause since most mezzanine

lending is securitized. Neither the rating agencies nor law

firms would deal with the policy if it is different from the

standard form.

44. Petitioner takes the position that the term "existence"

is superfluous to Section 627.7485, Florida Statutes.

45. A security interest is an interest in personal

property. Petitioner asserts that a security interest cannot

exist apart from the debtor having rights in the collateral. A

security interest is an interest in personal property that

secures the payment or performance of an obligation.

46. The term "existence" is not defined in the UCC.

Petitioner asserts that the term is subsumed in the term

"attachment."

47. Petitioner's interpretation of the UCC is that

"creation," "existence," and "attachment" are thoroughly

synonymous.

48. According to Mr. Prendergast, a security interest does

not come into enforceable being until the elements of attachment

are present. However, he admits it is possible to have a

transaction where a security agreement is signed, thus creating a

security interest in the collateral, and the attachment date

could be six months later.

49. By definition in the UCC, a security interest is

created by a security agreement, not by attachment.

50. Respondent asserts that an enforceable security

interest may not exist without attachment; an enforceable

security interest may not exist without perfection; and an

enforceable security interest may not exist without priority, but

the amended statute lists these three elements plus a fourth,

existence, in order to comply.

51. UCC insurance policies, such as the EAGLE 9® UCC

Insurance Policy for Lenders, pays claims based upon the face

value of the policy, the indebtedness outstanding, or the value

of the collateral. There cannot be a claim under the policy

unless there is collateral and an enforceable security interest.

A security interest is not enforceable as a matter of law unless

value has been given, the debtor has rights in the collateral,

and there is a security agreement.

52. First American takes the position that it did not use

the word "existence" in the EAGLE 9® UCC Insurance Policy for

Lenders because it has no meaning different from attachment.

Petitioner asserts that including the term "existence" in the

policy would result in the policy having two insuring clauses

insuring the same thing. Further, by this being the only policy

in Florida containing the term "existence," Petitioner argues

that it would not be received well by rating agencies and law

firms that deal with the policies.

53. First American testified that it would continue to

conduct a search of UCC filing office records even if it issued

the EAGLE 9® UCC Insurance Policy for Lenders or any of the

proposed endorsements to the policy.

54. An endorsement is not a stand-alone form, and can only

be used as part of an existing insurance policy.

55. OIR, through General Counsel Steve Parton and others,

was involved in the legislative process and provided input into

the drafting of the statute at issue, as did representatives of

the title industry. OIR has interpreted the statute as written

to require that a valid UCC title insurance policy must address

the four distinct elements listed in the statute, namely,

"existence," "attachment," "perfection," and "priority."

CONCLUSIONS OF LAW

56. The Division of Administrative Hearings has

jurisdiction over the parties and the subject matter of this

proceeding. §§ 120.569 and 120.57, Fla. Stat.

57. In 2005, the Florida Legislature, through HB 75,

amended Section 624.608, Florida Statutes, to broaden the

definition of "title insurance" to include the sale of some, but

not all, UCC title insurance products.

58. A new paragraph was added to the statute which

provides, in part, "Title insurance is . . . insurance of owners

and secured parties of the existence , attachment, perfection, and

priority of security interests in personal property under the

Uniform Commercial Code." (emphasis added)

59. House Bill 75 required the OIR to approve a title

insurance form and corresponding rate for the UCC insurance

described in Subsection 624.608(2), Florida Statutes, not later

than January 1, 2006. Pursuant to this mandate, the OIR approved

a UCC Insurance form for use by the industry that includes the

elements found in the definition of UCC insurance. Petitioner's

UCC Title Insurance Policy for Lenders is not in compliance with

that form.

60. The Legislature also amended additional title insurance

statutes to account for the new coverage, and particularly those

sections that call for a title search and examination. The

amended Section 627.7845, Florida Statutes, provides that:

A title insurer may not issue a title

insurance commitment, endorsement, or title

insurance policy until the title insurer has

caused to be conducted a reasonable search

and examination of the records of a Uniform

Commercial Code filing office . . ., has

examined such other information as may be

necessary, and has caused to be made a

determination of insurability of . . . the

existence , attachment, perfection, and

priority of a Uniform Commercial Code

Security Interest, including endorsement

coverage, in accordance with sound

underwriting practices. (emphasis added)

61. The testimony and evidence produced at hearing by

Petitioner clearly demonstrates that the First American EAGLE 9®

UCC Lenders Policy does not specifically insure for the

"existence" of a security interest. The OIR asserts that a

security interest is created when a security agreement is

executed and such an event brings a security interest into

"existence." Further, based upon the Legislature's inclusion of

the term "existence" in the definition of UCC title insurance,

the OIR is obligated under its statutory grant of authority to

review forms in a manner consistent with Florida law. First

American argues that the existence of a security interest is

covered under the policy, notwithstanding the lack of the

specific word given the requirements of the UCC.

62. Petitioner's title insurance form insures "attachment,

perfection, and priority" as required by the definition, but does

not specifically insure the "existence" of a security interest.

First American argues that the term "existence" is synonymous

with the term "attachment" and that by insuring the "attachment"

of a security interest, Petitioner is simultaneously insuring the

"existence" of the same security interest. In the same breath,

Petitioner argues that they are unable to specifically insure for

the "existence" of the security interest because it is unfamiliar

with the term, that the term has no meaning under the UCC, and

that the term is not defined in Florida Statutes.

63. Florida's Supreme Court has spoken to the guiding

principles of statutory construction in the review of title

insurance statutes. In Hectman v. Nations Title Insurance of New

York , 840 So. 2d 993, 996 (Fla. 2003), the court, citing Hawkins

v. Ford Motor Co. , 748 So. 2d 993 (Fla. 1999), held that "[i]t is

an elementary principle of statutory construction that

significance and effect must be given to every word, phrase,

sentence, and part of the statute if possible, and words in a

statute should not be construed as mere surplusage."

64. "Legislative intent is the polestar by which a court

must be guided in interpreting the provisions of a law."

Hechtman , 840 So. 2d at 996. See McLean v. State , 934 So. 2d

1248, 1258 (Fla. 2006); City of Clearwater v. Acker , 755 So. 2d

579 (Fla. 1999). "In ascertaining the legislative intent, a

court must consider the plain language of the statute, give

effect to all statutory provisions, and construe related

provisions in harmony with one another." Hechtman , 840 So. 2d at

996. See M.W. v. Davis , 756 So. 2d 90 (Fla. 2000); and Hawkins

v. Ford Motor Co. , 748 So. 2d 993 (Fla. 1999).

65. Contrary to Petitioner's position that the term

"existence" is mere surplusage, nothing more than a synonym for

"attachment," OIR asserts that the term must have meaning

separate and apart from the other terms in the statute, and must

be interpreted in a manner that gives the term effect as a

distinct element in the definition of UCC insurance.

66. By including the term "existence" in the definition of

UCC title insurance found in Subsection 624.608(2), Florida

Statutes, the Legislature intended for any title insurer writing

such a product to provide coverage for this risk along with the

other elements set forth. Ignoring the term because its meaning

is not specifically defined in the statute, or, is arguably, not

commonly used in a particular industry, or to treat it as mere

surplusage would violate the most basic rules of statutory

construction.

67. Steve Parton, OIR's General Counsel, was personally

involved in the legislative process concerning the amendments to

the title insurance law, which added the term "existence" to the

required elements for insuring a security interest. It is the

OIR's position that a security interest is created by a security

agreement. Therefore, "existence" is distinguished from

"attachment" because the security interest comes into being when

the security agreement is created, not when the security interest

is attached. His position that a valid UCC title insurance

policy must address the four distinct elements outlined in the

statute is a reasonable conclusion based upon the basic

principles of statutory construction, as well as the distinction

drawn by petitioner between "existence" and "attachment."

68. Subsection 679.1021(1)(ttt), Florida Statutes, defines

a "security agreement" as "an agreement that creates or provides

for a security interest." It is the signing or entering into a

security agreement that creates the security interest.

Similarly, other provisions in the UCC contemplate that existence

and attachment are separate and distinct issues. Subsection

679.2031(1), Florida Statutes, states, in part: "A security

interest attaches to collateral when it becomes enforceable

against the debtor with respect to the collateral, unless an

agreement expressly postpones the time of attachment." This

contemplates a situation where a security agreement between the

parties is created or comes into existence and the parties

further agree that the time of attachment is postponed to a later

date. Subsection 679.1021(1)(f)1., Florida Statutes, states, in

part:

Oil, gas, or other minerals that are subject

to a security interest that:

a. is created by a debtor having an

interest in the mineral before extraction;

and

b. attaches to the minerals as extracted .

. . .

Both of these are examples of circumstances contemplated by the

UCC where a security interest "exists" prior to the attachment of

the collateral.

69. The Florida Supreme Court, in the case of Pan American

World Airways, Inc. v. Florida Public Service Commission , 427 So.

2d 716 (1983), held that "the administrative construction of a

statute by an agency or body responsible for the statute's

administration is entitled to great weight and should not be

overturned unless it is clearly erroneous." Respondent's

construction of Subsection 624.608(2), Florida Statutes, is

reasonable and supported by the greater weight of the evidence

produced at hearing.

70. The simple fact that First American submitted four

title insurance policy forms to OIR for approval (that were

withdrawn for purposes of the final hearing) that included the

term "existence" refutes its argument that such term is unknown

to the company. Petitioner's claim that including the term

"existence" in the UCC Lenders Policy would be imprudent and

unwise is not borne out by the fact that the term is prominently

featured in the "Covered Risks" section of the UCC Filing

Insurance Policy, the UCC Insurance Policy for Buyers, the UCC

Vacation Interest Policy, and the UCC Search Insurance Policy.

71. By including the term "existence" in the statute, the

legislative intent was to limit the type of transactions that

title insurers could cover. This new type of title insurance is

limited to situations where buyers or lenders would be insured

against the existence of a pre-existing security interest in the

collateral. Petitioner appeared comfortable in insuring against

the existence of a security interest in the four forms withdrawn

from consideration. If a concern exists for First American in

offering the same coverage to lenders, the company can choose not

to offer such a product. Offering the product, without the

specific coverage for "existence" of the security interest,

however, would violate the intent of the Legislature.

72. Petitioner's argument that the words of Subsection

624.608(2), Florida Statutes, are plain and clear, and,

therefore, need no interpretation is not supported by the greater

weight of the evidence. Petitioner's assertion that the specific

words "existence, attachment, perfection, and priority" need not

appear within a title insurance policy in order for the policy to

be one of title insurance is contradicted by its own actions. As

stated above, the four title insurance policy forms withdrawn

from consideration by Petitioner in this matter prominently

included the four explicit terms. No reasonable explanation was

given by Petitioner as to why the term "existence" could not be

included in the one remaining policy for consideration here.

First American's argument that "existence" means "attachment" is

not justified by Petitioner's own UCC expert's testimony or by

the above examples taken from actual sections of the UCC which

contemplate existence of a security interest before the

collateral attaches. Accordingly, Petitioner's exclusion of the

term "existence" from its UCC lenders policy provides a factual

and legal basis for OIR's disapproval of the policy and

endorsements at issue.

RECOMMENDATION

Based upon the foregoing findings of fact and conclusions of

law, it is

RECOMMENDED that the Office of Insurance Regulation issue a

Final Order disapproving the EAGLE 9® UCC Insurance Policy for

Lenders and the associated endorsements.

DONE AND ENTERED this 3rd day of July, 2007, in

Tallahassee, Leon County, Florida.

S

ROBERT S. COHEN

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

[phone] SUNCOM 278-9675

Fax Filing [phone]

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 3rd day of July, 2007.

COPIES FURNISHED :

Richard J. Santurri, Esquire

Wendy Russell Wiener, Esquire

Mang Law Firm, P.A.

Post Office Box 11127

Tallahassee, Florida 32399-0333

Jeffrey W. Joseph, Esquire

Office of Insurance Regulation

612 Larson Building

200 East Gaines Street

Tallahassee, Florida 32399-4260

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.