16-003769 Payroll Management, Inc. vs. Department Of Financial Services, Division Of Workers' Compensation Status: Closed Recommended Order on Wednesday, April 5, 2017.

Summary: Petitioner failed to establish that the Department's acceptance of FSIGA's security deposit recommendation was erroneous.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

PAYROLL MANAGEMENT, INC.,

Petitioner,

vs. Case No. 16 - 3769

DEPARTMENT OF FINANCIAL

SERVICES, DIVISION OF WORKERS'

COMPENSATION,

Respondent.

_______________________________/

RECOM MENDED ORDER

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

on November 9, 2016, before Lawrence P. Stevenson, a duly -

designated Administrative Law Judge, via video teleconference

from locations in Jacksonville and Tallahassee, Florida.

APPEAR ANCES

For Petitioner: Nate Wesley Strickland, Esquire

Colodny Fass, P.A.

215 South Monroe Street, Suite 701

Tallahassee, Florida 32301

Tim James West, Esquire

Co lodny Fass, P.A.

1401 Northwest 136th Avenue

Sunrise, Florida 33323

For Respondent: David Davis Hershel, Esquire

Alexander Brick, Esquire

Department of Financial Ser vices

200 East Gaines Street

Tallahassee, Florida 32399

STATEMENT OF THE ISSUE

At issue in this proceeding is whether Payroll Management,

Inc. (ÐPMIÑ), a former self - insurer, should be required to

increase its qualifying security deposit wi th the Florida Self -

Insurers Guaranty Association, Inc. (ÐFSIGAÑ) , from $5,144,108

to $7,434,705, as directed by the Department of Financial

Services, Division of WorkersÓ Compensation (the ÐDepartmentÑ).

PRELIMINARY STATEMENT

On May 11, 2016, FSIGA submit ted a recommendation to the

Department recommending that the Department require PMI, a

former workersÓ compensation self - insurer in Florida, to

increase its qualifying security deposit held by FSIGA from

$5,144,108 to $7,434,705, based on FSIGAÓs determina tion that

PMI lacked the financial strength to ensure the timely payment

of all claims it incurred while a self - insurer in Florida. By

letter dated May 25, 2016, the Department notified PMI of

FSIGAÓs recommendation, that the Department had accepted FSGIA Ós

recommendation, and directing PMI to increase its security

deposit to $7,434,705.

On June 21, 2016, PMI timely filed with the Department a

ÐRequest for Hearing Involving Disputed Issues of Fact,Ñ

contesting the DepartmentÓs preliminary decision and requ esting

a formal evidentiary hearing.

On July 1, 2016, the Department forwarded the Request for

Hearing to the Division of Administrative Hearings (ÐDOAHÑ) for

the assignment of an administrative law judge and the conduct of

a formal hearing. The fina l hear ing was scheduled for

September 13, 2016. One continuance was granted based upon

PMIÓs unopposed motion. The final hearing was rescheduled for

November 9, 2016, on which date it was convened and completed.

At the hearing, Petitioner presented t he t estimony of

Donna C. Mickle - Bee, the P resident and CEO of PMI; Brian D. Gee,

the E xecutive D irector of FSIGA; and Steven Glicksman, the

P rincipal of Glicksman Consulting, LLC , and PMIÓs actuary.

PetitionerÓs Exhibit 1 was admitted into evidence.

The Dep artment presented the testimony of Mr. Gee and of

Greg Jenkins, the DepartmentÓs B ureau C hief of F inancial

A ccountability. The DepartmentÓs Exhibits 1 through 6 were

admitted into evidence.

Joint Exhibit 1, the March 25, 2016, actuarial study of PMI

prepa red by Mr. Glicksman, was admitted into evidence.

The one - volume Transcript of the final hearing was filed at

DOAH on November 28, 2016. One extension of the time for filing

p roposed r ecommended o rders was granted. In accordance with the

modified schedul e, the parties timely filed their Proposed

Recommended Orders on December 16, 2016.

Unless otherwise stated, all statutory references are to

the 2016 edition of the Florida Statutes.

FINDING S OF FACT

Based on the oral and documentary evidence adduced at t he

final hearing, and the entire record in this proceeding, the

following F indings of F act are made:

1. The Department is the state agency responsible for

administering the Workers Ó Compensation Law, chapter 440,

Florida Statutes.

2. The DepartmentÓs r esponsibilities include

administration of the self - insurance program in conjunction with

FSIGA, pursuant to sections 440.38, 440.385, and 440.386,

Florida Statutes.

3. FSIGA is a private, not - for - profit corporation created

by section 440.385. The chief p urpose of FSIGA is to guarantee

payment of covered workersÓ compensation claims to employees of

its insolvent member self - insurers. All self - insurers, other

than public utilities and government entities, are required to

be members of FSIGA as a condition of their authority to self -

insure. § 440.385(1)(a), Fla. Stat.

4. Sections 440.10(1) and 440.38(1) establish the general

requirement that employers must obtain and maintain workersÓ

compensation insurance in Florida. The exception to this

general requir ement is set forth in section 440.38(1)(b), which

allows an employer to self - insure after furnishing satisfactory

proof to FSIGA that such employer Ð has the financial strength

necessary to ensure timely payment of all current and future

claims individually and on behalf of its subsidiary and

affiliated companies with employees in this state and receiving

an authorization from the department to pay such compensation

directly.Ñ § 440.38(1)(b), Fla. Stat.

5. FSIGA pays the covered claims of current and forme r

insolvent self - insurer members to the extent an insolvent self -

insurer's security deposit is insufficient to cover the claims.

An insolvency fund is established and managed by FSIGA for the

purpose of meeting the obligations of insolvent members after

th e exhaustion of any security deposit. Pursuant to section

440.385(3)(a), FSIGA assesses its members to maintain the

insolvency fund.

6. In the event FSIGA determines that a current or former

member lacks financial strength necessary to ensure timely

paym ent of current and estimated future worker sÓ compensation

claims, FSIGA may recommend that the Department require an

increase to such memberÓs Ðsecurity deposit in an amount

determined by the association to be necessary to ensure payment

of compensation cl aims.Ñ £ 440.385(3)(b)7.c., Fla. Stat.

7. The Department is required to accept FSIGAÓs

recommendation unless it finds by clear and convincing evidence

that the recommendation is erroneous. §§ 440.38(1)(b) and

440.385(6)(a), Fla. Stat.

8. PMI is a priva tely owned professional employer

organization headquartered in Fort Walton Beach. It has

conducted business throughout Florida and the s outheastern

United States for over 30 years. PMI was authorized as a self -

insurer for workersÓ compensation in Florida on September 1,

2001. It was required to post an initial security deposit of

$1,000,000 with FSIGA.

9. Between 2001 and 2015, FSIGA made annual

recommendations to the Department, pursuant to sections

440.38(1)(b) and 440.385(3)(b)7., as to whether PMI s hould be

required to increase its qualifying security deposit based on a

review of the companyÓs financial strength as reflected in its

financial statements. By 2015, PMIÓs security deposit had grown

to $5,144,108. Through 2015, PMI had posted and mainta ined its

qualifying security deposit every year it participated in the

self - insurance program.

10. In late March 2016, PMI submitted an actuarial report

dated March 25, 2016, to FSIGA. The actuarial report was

prepared by Steven Glicksman and determined that PMIÓs estimated

outstanding losses, i.e., the cost of unpaid claims, were

$7,960,339 as of December 31, 2015 , and that the actuarial

present value of PMIÓs estimated outstanding losses as of

December 31, 2015, using a fou r - percent (4%) discount rate a s

prescribed by Florida Administrative Code R ule 69L - 5.218(2), was

$7,434,705.

11. The March 25, 2016 , report included the following

notes:

Comparison to Previous Study

The estimated outstanding losses (actuarial

central estimate) are $7,960,339 as of

De cember 31, 2015. This compares to

$5,514,248 as of December 31, 2015 in the

previous study (dated April 30, 2015).

The variance is a material adverse

deviation. The increases in 2015 are due

primarily to actuarial payroll in 2015 being

$173,681,101 comp ared to the projected

payroll of $110,000,000. Greater payroll

corresponds to an increased exposure to

loss.

We also observed that 2014 is emerging

higher than previous projections.

Potential for Material Adverse Deviation

The estimated outstanding los ses are the

actuarial central estimate. It is based on

the probable outcomes, but not all possible

outcomes. The risk of material adverse

deviation is a judgment as to actual losses

materially exceeding the actuarial central

estimate.

The Actuarial Stan dard of Practice (ASOP 36)

requires commentary when the actuary

Ðreasonabl y believes that there are

significant risks and uncertainties that

could result in material adverse deviation.Ñ

ASOP 36 does not specify a materiality

standard.

• As with all insuran ce programs, there is

the possibility that losses will emerge

worse than expected.

• PMI is a relatively small sized program.

• The historical loss experience had had an

occasional large claim. PMI purchases

reinsurance to mitigate the impact of

catastrophi c claims. It currently has a

$500,000 self - insured retention. However,

there is the potential for multiple large

claims within the retention.

• There have [been several] operational

changes that may have impacted loss

development. There is convincing evi dence

that PMI has accelerated its paying losses

and is reserving more adequately [than] it

has in the recent past.

• There has been material change in the mix

of class codes.

• There is a roll - forward extrapolation to

December 31, 2016.

• We have supplemente d internal data with

insurance industry statistics and

actuarial judgment.

We have not set a materiality standard.

However, based on the above factors, we

believe that the estimated outstanding loss

amount is subject to a significant level of

risk of adv erse deviation as of December 31,

2015 and December 31, 2016.

This disclosure is based on ASOP 36 and is

not intended to be exclusive to this

situation. Differences in the disclosure

from previous studies are not intended to be

a material change in our o pinion, unless

specifically stated otherwise. It is not a

qualification of the study.

12. Effective May 1, 2016, PMI voluntarily terminated its

authorization to self - insure its workersÓ compensation claims in

Florida.

13. On May 11, 2016, FSIGA reco mmended that the Department

require PMI to increase its qualifying security deposit by the

amount of $2,290,597. 1/ That recommendation was made pursuant to

sections 440.38(l)(b) and 440.385(3)(b)7. and r ules 69L -

5.209(l)(b) and 69L - 5.218(2). The recomme ndation was based on

FSIGA's review of PMI's financial statements and FSIGAÓs

determination of an equivalent credit rating of Caa3 for PMI, a

rating that is less than investment grade. 2/ FSIGA determined

that PMI did not have the financial strength necess ary to ensure

timely payment of claims incurred as a self - insurer. The

Department accepted FSIGA's recommendation , and by letter dated

May 25, 2016, required PMI to increase its qualifying security

deposit by the amount of $2,290,597, from $5,144,108 to

$7,434,705. As of the date of the hearing, PMI had not posted

the additional security with FSIGA.

14. Brian Gee, FSIGAÓs E xecutive D irector, testified that

he conducted an analysis of PMI's financial strength by

examining its audited financial statement s for the year ending

December 31, 2013, and its draft financial statements for the

year ending December 31, 2014. 3/ He derived an equivalent credit

rating by applying a public domain MoodyÓs Investors Service

methodology. He checked his result against a proprietary

MoodyÓs product called RISCCALC PLUS, a model based on a large

database of financial statements. The RISCCALC PLUS model uses

default frequencies to derive a credit rating. Mr. GeeÓs

analysis led him to conclude that PMI does not have the

fi nancial strength necessary to ensure the timely payment of its

self - insured claims.

15. Mr. Gee testified that his review of PMIÓs financial

information led him to conclude it lacks the financial strength

to ensure timely payment of claims. He cited seve ral factors

supporting his conclusion: PMI has shown net losses over the

past three years; the company is highly leveraged, with low

ownersÓ equity relative to total liabilities; uncertainty

regarding the collectability of a $4 million receivable from

Bri tish Petroleum (ÐBPÑ) 4/ ; and a large amount of back taxes owed

to the Internal Revenue Service. 5/

16. Mr. Gee also took no te of the facts that PMIÓs

2014 financial statement was labeled ÐdraftÑ and was not a

signed auditorÓs opinion, and that PMI had su pplied no financial

statement at all for 2015. He stated that FSIGA had been

requesting current financial information from PMI but was not

receiving it. Mr. Gee concluded there was enough uncertainty in

PMIÓs financial situation that he could conclude th e company

lacked the financial strength to ensure the payment of current

and future claims without regard to the calculation of an

equivalent credit rating required by rule 69L - 5.218(4).

Mr. GeeÓs conclusion is reasonable in light of the evidence and

is h ereby accepted.

17. R ule 69L - 5.209 requires current and former self -

insurers, including PMI, to submit financial statements, audited

in accordance with Generally Accepted Auditing Standards, to

FSIGA no later than 120 days after the end of their fiscal ye ar.

PMIÓs fiscal year ends on December 31. As of the hearing date,

PMI had submitted only draft unsigned financial statements for

fiscal year 2014, 6/ and no financial statements at all for fiscal

year 2015.

18. On May 11, 2016, the Department received F SIGA's

letter recommending the Department require PMI to increase its

qualifying security deposit to $7,434,705. The recommendation

was reviewed by staff of the Bureau of Financial Accountability

(the ÐBureauÑ) in the Department's Division of Workers'

Com pensation.

19. Bureau Chief Greg Jenkins testified that the review

did not involve recreating FSIGAÓs work in developing an

equivalent credit rating for PMI. FSIGA collects and reviews

financial statements and loss reserve information from self -

insurer s pursuant to contract with the Department and is

considered the DepartmentÓs financial expert as to these tasks.

Mr. Jenkins stated that Bureau staff did review other

information for accuracy, including the numerical values set

forth in FSIGAÓs recommend ation letter.

20. Based on his staffÓs review, Mr. Jenkins approved the

FSIGA recommendation. The Division of WorkersÓ Compensation,

concluding that the FSIGA recommendation was not erroneous,

recommended to Chief Financial Officer (ÐCFOÑ) Jeff Atwater that

the Department accept FSIGAÓs recommendation and require PMI to

increase its qualifying security deposit by $2,290,597, from

$5,144,108 to $7,434,705. By letter dated May 25, 2016, signed

by C F O Atwater, the Department required PMI to increase its

s ecurity deposit by the stated amount.

21. On or about October 19, 2016, PMI submitted an updated

actuarial report dated October 18, 2016, to FSIGA. The updated

actuarial report was prepared by Mr. Glicksman and determined

that PMIÓs estimated outstandin g losses were $7,265,767 as of

August 31, 2016 , and that the actuarial present value of PMIÓs

estimated outstanding losses as of August 31, 2016, using a four

percent (4%) discount rate as prescribed by rule 69L - 5.218(2),

was $6,775,263.

22. Mr. Glicksm an also included a projection of losses

through December 31, 2016, which he explained as follows:

The estimated outstanding losses (actuarial

central estimate) are $5,758,346 as of

December 31, 2016. The present value of the

estimated outstanding losses ( actuarial

central estimate) is $5,369,488 based on a

4.0% interest rate as of December 31, 2016.

These amounts assume old payment patterns.

However, the amounts for December 31, 2016

are dependent on PMIÓs actual payments from

September 1, 2016 to Decemb er 31, 2016.

Since greater payments results in lower

estimated outstanding losses, it is possible

that PMI will have estimated outstanding

losses of less than $5,758,346 (present

value $5,369,488) on December 31, 2016.

In fact, we have observed that PMI has

accelerated payments. From January 1, 2016

to August 31, 2016, paid losses equaled

$4,963,579 ($620,488 per month). We have

modeled a continuation of accelerated

payments. Assuming projected losses paid of

$1,959,647 ($477,395 per month) from

Septem ber 1, 2016 to December 31, 2016,

estimated outstanding losses are $5,356,187

and the present value of the estimated

outstanding losses are $4,995,098 on

December 31, 2016. We believe these amounts

are reasonable. [ Citations to internal

exhibits omitted. ]

23. Mr. Glicksman testified that material differences

emerged during the period betw een his completion of the

March 25, 2016 , report and the October 18, 2016 , report.

Mr. Glicksman explained that more recent information, including

a date certain for PMIÓs termination of its self - insurer

authorization, improved loss information, increased reserves ,

and accelerated claims payments, led him to believe that the

estimated losses were less than he had originally projected.

24. Mr. Glicksman testified that , upon noticing that PMIÓs

claims payments had accelerated much faster than he expected, he

contacted Ms. Mickle - Bee regarding the claims data. Ms. Mickle -

Bee confirmed to Mr. Glicksman that PMI was closing claims as

rapidly as possible.

25. At the hea ring, Ms. Mickle - Bee testified that PMI has

always paid claims at an ÐaggressiveÑ rate as an overall costs

savings measure. She stated that the companyÓs experience has

been that providing quick medical treatment and paying the bills

greatly reduces the c hances of litigation. Mr. Glicksman

supported this view, testifying that ÐthereÓs nothing better

than a closed claim to reduce costs.Ñ

26. Mr. Glicksman concluded by stating that Ðthere could

be no good outcomeÑ to requiring PMI to increase its security

deposit to $7,434,705. He testified, ÐTheyÓre already holding

more than enough money to pay off their claims . . . with almost

certainty. And by pushing PMI into . . . a financial stress, it

canÓt improve their situation, it can only hurt it. I donÓt

kn ow why they would do it.Ñ

27. Mr. Gee testified that he had as yet reached no

conclusions about the October 18, 2016 , actuarial report. He

testified that a claims reviewer had been assigned to look at

the case files, which are the main input into the act uarial

process. Mr. Gee also stated that he had made Ðsome preliminary

findings about some self - insured retention numbers that appear

to be incorrect,Ñ but that he was awaiting results from the

claims reviewer in order to draw a conclusion about the repo rt.

28. Mr. Jenkins testified that he has received a copy of

PMIÓs October 18, 2016 , actuarial report. Mr. Jenkins stated

that he had glanced at the report but was awaiting a

recommendation from FSIGA before undertaking a thorough review

of the document.

CONCLUSIONS OF LAW

29. The Division of Administrative Hearings has

jurisdiction of the subject matter of and the parties to this

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

30. Chapter 440, Florida Statutes, is the WorkersÓ

Compensation Law, th e purpose of which has been described as Ðto

provide for employers a liability that is limited and

determinative, and to employees a remedy that is both

expeditious and independent of proof of fault.Ñ Fla . Erection

Serv., Inc. and Risk Mgmt. Serv., Inc. v . McDonald , 395 So. 2d

203, 209 (Fla. 1st DCA 1981). Section 440.015 sets forth the

legislative intent as follows, in relevant part:

It is the intent of the Legislature that the

WorkersÓ Compensation Law be interpreted so

as to assure the quick and effici ent

delivery of disability and medical benefits

to an injured worker and to facilitate the

workerÓs return to gainful reemployment at a

reasonable cost to the employer . . . . It

is the intent of the Legislature to ensure

the prompt delivery of benefits t o the

injured worker. Therefore, an efficient and

self - executing system must be created which

is not an economic or administrative burden.

The department, [Agency for Health Care

Administration], the Office of Insurance

Regulation, the Department of Educa tion, and

the Division of Administrative Hearings

shall administer the WorkersÓ Compensation

Law in a manner which facilitates the self -

execution of the system and the process of

ensuring a prompt and cost - effective

delivery of payments.

31. This proceed ing focuses on the self - insurance portion

of the WorkersÓ Compensation Law, the basic statutory framework

for which is established in sections 440.38, 440.385, and

440.386. These statutory provisions are implemented by Florida

Administrative Code C hapter 69L - 5.

32. The Department administers the self - insurance program

for liabilities arising under the WorkersÓ Compensation Law, and

has jurisdiction over PMI as a former self - insurer 7/ pursuant to

sections 440.38 and 440.385.

33. Section 440.38(1)(b) pro vides as follows, in relevant

part:

(1) Every employer shall secure the payment

of compensation under this chapter:

* * *

(b) By furnishing satisfactory proof to the

Florida Self - Insurers Guaranty Association,

Incorporated, created in s. 440.385, that it

has the financial strength necessary to

ensure timely payment of all current and

future claims individually and on behalf of

its subsidiary and affiliated companies with

employees in this state and receiving an

authorization from the department to pay

s uch compensation directly. The association

shall review the financial strength of

applicants for membership, current members,

and former members and make recommendations

to the department regarding their

qualifications to self - insure in accordance

with th is section and ss. 440.385 and

440.386. The department shall act in

accordance with the recommendations unless

it finds by clear and convincing evidence

that the recommendations are erroneous.

34. Section 440.385(1) provides as follows, in relevant

part :

(1) Creation of association. Ï

(a) There is created a nonprofit corporation

to be known as the ÐFlorida Self - Insurers

Guaranty Association, Incorporated,Ñ

hereinafter referred to as Ðthe association.Ñ

Upon incorporation of the association, all

individ ual self - insurers as defined in ss.

440.02(24)(a) and 440.38(1)(b), other than

individual self - insurers which are public

utilities or governmental entities, shall be

members of the association as a condition of

their authority to individually self - insure

i n this state . . . . The activities of the

association shall be subject to review by the

department. The department shall have

oversight responsibility as set forth in this

section . . . .

* * *

(b) A member may voluntarily withdraw from

the associati on when the member voluntarily

terminates the self - insurance privilege and

pays all assessments due to the date of such

termination. However, the withdrawing member

shall continue to be bound by the provisions

of this section relating to the period of his

or her membership and any claims charged

pursuant thereto . . . .

35. Section 440.385(3) provides as follows, in relevant

part:

(3) Powers and duties. Ï

* * *

(b) The association may:

* * *

7. Collect and review financial information

from employ ers and make recommendations to

the department regarding the appropriate

security deposit and reinsurance amounts

necessary for an employer to demonstrate

that it has the financial strength necessary

to ensure the timely payment of all current

and future c laims. The association may

audit and examine an employer to verify the

financial strength of its current and former

members. If the association determines that

a current or former self - insured employer

does not have the financial strength

necessary to en sure the timely payment of

all current and estimated future claims, the

association may recommend to the department

that the department:

a. Revoke the employerÓs self - insurance

privilege.

b. Require the employer to provide a

certified opinion of an ind ependent actuary

who is a member of the American Academy of

Actuaries as to the actuarial present value

of the employerÓs estimated current and

future compensation payments, using a 4 -

percent discount rate.

c. Require an increase in the employerÓs

secur ity deposit in an amount determined by

the association to be necessary to ensure

payment of compensation claims. The

department shall act on such recommendations

as provided in paragraph (6)(a) . . . .

36. Section 440.385(6)(a) provides as follows:

(6) Powers and Duties of Department. -- The

department shall:

(a) Review recommendations of the

association concerning whether current or

former self - insured employers or members of

the association have the financial strength

necessary to ensure the timely p ayment of

all current and estimated future claims. If

the association determines an employer does

not have the financial strength necessary to

ensure the timely payment of all current and

future claims and recommends action pursuant

to paragraph (3)(b), t he department shall

take such action as necessary to order the

employer to comply with the recommendation,

unless the department finds by clear and

convincing evidence that the recommendation

is erroneous.

37. R ule 69L - 5.209(1)(b) provides as follows:

Cu rrent Self - Insurers and Former Self -

Insurers, other than Governmental Entities,

shall submit their Financial Statements no

later than 120 days after the end of their

fiscal year. Failure to submit the required

Financial Statements shall constitute good

ca use for revocation of the self - insurance

authorization in addition to civil penalties

specified in Rule 69L - 5.217, F.A.C.

(1) The Financial Statements shall meet the

following requirements:

* * *

(b) The Financial Statements shall

demonstrate that the self - insurer has the

financial strength necessary to ensure the

timely payment of all current and future

claims . . . .

38. R ule 69L - 5.218(3), (4) provide s :

(3) Former Self - Insurers, other than

Governmental Entities, that do not have an

Investment Grade Credit Rating shall provide

a Security Deposit equal to the actuarially

determined outstanding loss reserves

discounted to present value at a four

percent (4%) discount rate. In no case

shall the amount of the Security Deposit be

less than $100,000.

(4) In the event that a Current Self -

Insurer or Former Self - Insurer does not have

a current published Credit Rating, the

Association or the Department shall

determine an equivalent rating by performing

an analysis of the Financial Statements

provided in accor dance with Rule 69L - 5.209,

F.A.C., and the amount of the Security

Deposit shall be determined using the

equivalent rating as the Credit Rating. A

Current Self - Insurer or Former Self - Insurer

that disagrees with the equivalent rating

may provide a current C redit Rating. If the

Current Self - Insurer or Former Self - Insurer

provides a current Credit Rating, the

security deposit requirement will be

determined using the current Credit Rating

instead of the equivalent rating and any

excess security deposit will be released.

39. PMI is a former self - insurer and does not have a

current published C redit R ating. PMI did not dispute FSIGAÓs

determination that PMIÓs equivalent rating was below investment

grade. Therefore, PMI is required to provide a security deposit

Ðequal to [its] actuarially determined outstanding loss reserves

discounted to present value at a four percent (4%) discount

rate.Ñ

40. The Department has preliminarily determined that PMI

should be required to post a security deposit in the amount of

$7 ,434,705, which is the amount of the actuarially determined

loss reserves discou nted to present value at a four - percent (4%)

discount rate, on December 31, 2015, as established in PMI's

March 25, 2016 , actuarial report. This determination is based

upon th e recommendation of FSIGA, which the Department must act

upon in the absence of Ðclear and convincing evidence that the

recommendation is erroneous.Ñ § 440.385(6)(a), Fla. Stat.

41. PMI contends that its October 18, 2016 , actuarial

report constituted the best evidence of the companyÓs financial

condition at the time of the hearing. PMI asserts that it would

be erroneous for the Department to increase its security deposit

to more than $6,775,263, the amount of the actuarially

determined loss reserves disc ou nted to present value at a four -

percent (4%) discount rate, as of August 31, 2016, as

established in PMI's October 18, 2016 , actuarial report.

42. The Department concedes that this proceeding is

conducted de novo pursuant to section 120.57(1)(k), Florid a

Statutes, but argues that the statutory scheme for review of

financial statements and actuarial reports for current and

former self - insurers requires a recommendation from FSIGA to the

Department for purposes of establishing the amount of a security

depo sit. This scheme contemplates review by both FSIGA and the

Department prior to agency action by the Department in response

to FSIGAÓs recommendation. As of the date of the final hearing,

FSIGA had made no recommendation to the Department regarding

PMIÓs October 18, 2016 , actuarial report.

43. The Department contends that, because financial

strength determinations and security deposit requirements are a

matter of special expertise for FSIGA and the Department, the

doctrine of Ðprimary jurisdictionÑ prec ludes consideration of

the October 18, 2016 , actuarial report in this proceeding.

44. In Flo - Sun, Inc. v. Kirk , 783 So. 2d 1029, 1037 - 38

(Fla. 2001), the Court explained the cited doctrine as follows:

The doctrine of primary jurisdiction

dictates that w hen a party seeks to invoke

the original jurisdiction of a trial court

by asserting an issue which is beyond the

ordinary experience of judges and juries,

but within an administrative agencyÓs

special competence, the court should refrain

from exercising it s jurisdiction over that

issue until such time as the issue has been

ruled upon by the agency.

45. It is understood that the issue in the instant

proceeding is evidentiary, not jurisdictional. Primary

jurisdiction would not operate to preclude DOAH fro m exercising

its jurisdiction over a section 120.57(1) proceeding involving

the Department. However, the undersigned is persuaded that the

rationale underlying the doctrine of primary jurisdiction is

analogous and applicable to the question of whether to rely on

the October 18, 2016 , actuarial report as evidence in this

proceeding, prior to the completion of FSIGAÓs review and

recommendation. Prudentially waiting for FSIGA and the

Department to fulfill their statutory review and approval

functions will gi ve this tribunal the benefit of the agencyÓs

experience and expertise in matters with which DOAH is not as

familiar. See Flo - Sun , 783 So. 2d at 1037. When the FSIGA and

Department reviews are complete, PMI will be provided its point

of entry to bring the October 18, 2016 , actuarial report before

DOAH.

4 6 . Some time has passed since the conclusion of the

hearing in this matter. In the interim, FSIGA may have

completed its review of PMIÓs October 18, 2016 , actuarial report

and made a recommendation to t he Department as to a revision in

the security deposit required of PMI. If this is the case,

fundamental fairness would dictate that PMI be given the benefit

of any reduction in the amount of the security deposit approved

by the Department.

RECOMMENDATIO N

Based on the foregoing, it is, therefore,

RECOMMENDED that the Department of Financial Services enter

a final order requiring Payroll Management, Inc. , to increase

its qualifying security deposit with the Florida Self - Insurers

Guaranty Association, Inc. , by $2,290,597, from $5,144,108 to

$7,434,705; or, in the alternative, that the Department of

Financial Services withdraw its May 25, 2016 , letter requiring

Payroll Management, Inc. , to increase its qualifying security

deposit by the amount of $2,290,597, from $5,144,108 to

$7,434,705 and issue a letter requiring PMI to increase its

qualifying security deposit to the amount recommended by the

Florida Self - Insurers Guaranty Association, Inc. , after its

review of the October 18, 2016 , actuarial report submitt ed by

Payroll Management, Inc.

DONE AND ENTERED this 5 th day of April , 2017 , in

Tallahassee, Leon County, Florida.

S

LAWRENCE P. STEVENSON

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 5 th day of April , 2017 .

ENDNOTE S

1/ FSIGA originally recommended this increase to the Department

by letter dated March 29, 2016. The Department accepted FSIGAÓs

recommendation and issued a letter to PMI, dated April 14, 2016,

directing the company to increase its qualifying security

deposit by $2,290,597, from $5,144, 108 to $7,434,705. PMIÓs

voluntary termination of its self - insurance authorization on

May 1, 2016, caused FSIGA to rescind its original letter and

revisit its recommendation. This action was not fully explained

by the parties at the hearing, but the unde rsigned infers it was

required because the DepartmentÓs security deposit rule has

separate , but functionally identical provisions for calculation

of security deposits for current self - insurers that do not have

an investment grade credit rating and for form er self - insurers

that do not have an investment grade credit rating. See Fla.

Admin. Code. R. 69L - 5.218(2) , (3).

As indicated by the May 11, 2016, letter, FSIGA did not

change its recommendation. The Department rescinded its

April 14, 2016, letter in a letter dated May 25, 2016, that

again directed PMI to increase its qualifying security deposit

by $2,290,597, from $5,144,108 to $7,434,705.

2/ If a FSIGA member has an investment grade credit rating

published by one of the three nationally recognized ra ting

agencies, then its security deposit with FSIGA is required to be

only $100,000. Fla. Admin. Code R. 69L - 5.218(1). ÐInvestment

grade credit ratingÑ is a long - term issuer credit rating equal

to or higher than ÐBaa3Ñ, ÐBBB - Ñ, or ÐBBB - Ñ issued by MoodyÓ s

Investors Service, Standard & PoorÓs, or Fitch Ratings,

respectively. Fla. Admin. Code R. 69L - 5.201(20). Because PMI

lacked a credit rating published by one of the three agencies,

FSIGA was required to determine an equivalent rating by

performing an an alysis of PMIÓs financial statements. Fla.

Admin. Code R. 69L - 5.218(4). At the hearing, PMI stipulated

that it does not have an investment grade credit rating.

3/ Mr. Gee was accepted without objection as an expert in

accounting and financial analysis.

4/ Mr. Gee testified that, despite his misgivings, he gave PMI

full credit for the BP receivable in calculating the equivalent

credit rating.

5/ Donna C. Mickle - Bee, the President and CEO of PMI, testified

that the company had been paying $50,000 per week to the IRS

since 2012 and still owes ÐaroundÑ $3.6 million in back taxes.

6/ Mr. Gee used information contained in the draft 2014

financial statements despite the fact that they were not signed

by the auditor. As with his use of the BP receivable i n his

credit rating calculation, Mr. Gee was here giving PMI the

benefit of every doubt.

7/ Florida Administrative Code rule 69L - 5.201(16) defines

Ðformer self - insurerÑ as ÐAn employer authorized by the

Department to fund its workersÓ compensation liabili ties as

prescribed in Sections 440.38(1)(b) or (6), F.S., whose

authorization has been revoked or voluntarily terminated with

remaining outstanding workersÓ compensation liabilities.Ñ

COPIES FURNISHED:

David Davis Hershel, Esquire

Department of Financia l Services

200 East Gaines Street

Tallahassee, Florida 32399

(eServed)

Tim James West, Esquire

Colodny Fass, P.A.

1401 Northwest 136th Avenue

Sunrise, Florida 33323

(eServed)

Alexander Brick, Esquire

Department of Financial Services

200 East Gaines Str eet

Tallahassee, Florida 32399

(eServed)

Nate Wesley Strickland, Esquire

Colodny Fass, P.A.

Suite 701

215 South Monroe Street

Tallahassee, Florida 32301

(eServed)

Julie Jones, CP, FRP, Agency Clerk

Division of Legal Services

Department of Financial Se rvices

200 East Gaines Street

Tallahassee, Florida 32399 - 0390

(eServed)

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of th is Recommended Order. Any exceptions

to this Recommended Order should be filed with the agency that

will issue the Final Order in this case.