ALJDEC

99A-259-INS · Department of Insurance · 2000-02-01

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: February 1, 2000 APPEARANCES: Thomas E. Haney, Esq. on behalf of Petitioner; Assistant Attorney General Shelby Cuevas on behalf of the Arizona Department of Insurance ADMINISTRATIVE LAW JUDGE: Lewis D. Kowal _____________________________________________________________________

ISSUES RAISED ON APPEAL 1. Did the Arizona Legislature (“Legislature”) intend to have the penalty provisions of A.R.S. §20-223(D) apply to the late filing of a audited financial statement/report? 2. Is the penalty that the Arizona Department of Insurance (“Department”) assessed against Stanford Life Insurance Company (“Petitioner”) in this matter excessive?

APPLICABLE LAW A.R.S. §20-223 provides: A. Each authorized domestic insurer shall annually on or before March 31 and each other authorized insurer shall annually on or before March 1 file with the director a true statement of its financial condition, transactions and affairs as of the December 31 preceding. The statement shall be completed pursuant to the instructions and accounting practices and procedures that are approved by the national association of insurance commissioners. The statement shall be in such general form and context as approved by the national association of insurance commissioners for the kinds of insurance to be reported on, and as supplemented for additional information required by the director. The director shall adopt rules providing requirements for the filing of annual audited financial statements. Coincident with the filing of its annual statement, each such insurer shall pay such fees prescribed by §20-167 for filing the annual statement and renewal of its certificate of authority…. B. The director may refuse to renew, or may suspend or revoke, the certificate of authority of any insurer failing to file its annual statement or pay its fees when due or within any extension of time therefor which the director, for good cause, may have granted. C. Any insurer failing to file an annual statement or to pay its fees pursuant to the provisions of this section is subject to payment of a penalty fee not to exceed twenty-five dollars for each day of delinquency.

A.R.S §220 states, in part: A. The director may after a hearing refuse to renew or may revoke or suspend an insurer’s certificate of authority, in addition to other grounds therefor in this title if the insurer: 2. Violates any provision of this title other than a provision as to which refusal, suspension or revocation is mandatory. 3. knowingly fails to comply with any lawful rule or order of the director. 4. Is found by the director to be in unsound condition or in such condition as to render its further transaction of insurance in this state hazardous to its policyholders or to the people of this state. 5. Usually compels claimants under its policies to accept less than the amount due them or to bring suit against it to secure full payment thereof. 6. Refuses to be examined or to produce its accounts, records and files for examination by the director when required. 7. fails to pay any final judgment rendered against it in this state within thirty days after the judgment becomes final. 8. Is affiliated with and under the same general management or interlocking directorate or ownership as another insurer which transacts direct insurance in this state without having a certificate of authority therefor, except as permitted to a surplus line insurer under article 5 of this chapter. I. If after a hearing the director finds grounds pursuant to Subsection A to suspend or revoke an insurer’s certificate of authority, the director may impose, in lieu of or in addition to such suspension or revocation, the following civil penalties: 10. A penalty not to exceed one thousand dollars for each violation and not to exceed an aggregate of ten thousand dollars within any six- month period with respect to unintentional violations. 11. A penalty not to exceed five thousand dollars for each violation and not to exceed an aggregate of fifty thousand dollars within any six- month period with respect to intentional violations. The insurer shall pay the civil penalty to the director for remission to the state treasurer to be placed in the state general fund. The civil penalty is in addition to any other penalty imposed by law…. FINDINGS OF FACT At the commencement of the hearing, the Department withdrew its penalty assessment of $75.00 against Stanford Life Insurance Company for the late filing of two 1999 quarterly financial statements and, as such, Petitioner’s appeal in that regard is moot and was not pursued during the hearing. At all times material to this matter, Petitioner was a life and disability insurer authorized to conduct business in the State of Arizona. 3. On July 15, 1999, the Department sent a notice to Petitioner advising Petitioner that it was delinquent in filing its 1998 audited financial statement/report (“Report”), and the Department intended to assess a penalty of up to $25.00 for each day that the Report is delinquent pursuant to A.R.S. §20-223. 4. On November 5, 1999, the Department sent Petitioner a document via fax advising Petitioner that the Department had assessed a penalty in the sum of $3,325.00 for the late filing of the Report. The assessment was derived by using a penalty in the amount of $25.00 for each day that the Report was delinquent. Although the Report was due on June 1, 1999, Petitioner filed it with the Department on October 12, 1999, 133 days after the June 1 deadline (133 days x $25.00 = $3,325.00). 5. On December 3, 1999, Petitioner filed a Notice of Appeal of the above-mentioned assessment. During the hearing, the parties did not dispute the facts but presented legal arguments concerning the statutory provisions applied by the Department in requiring the filing of the Report, the authority of the Department to assess penalties for its late filing, and whether the assessed penalty is excessive. . . . 7. A.R.S. §20-223 provides that a domestic insurer shall file on or before March 31, a statement depicting the true nature of its financial condition, transactions, and affairs as of the preceding December 31, commonly referred to as an annual statement. 8. In 1991, the Legislature amended Subsection A of A.R.S. §20-223 so as to include the following:

The statement shall be completed pursuant to the instructions and accounting practices and procedures that are approved by the national association of insurance commissioners. The statement shall be in such general form and context as approved by the national association of insurance commissioners for the kinds of insurance to be reported upon, and as supplemented for additional information required by the director.

9. Petitioner contends that the Legislature did not intend to have all supplemental filings, inserts, and additional reports incidental to the annual statement to be subject to the penalty provisions set forth in A.R.S. §20-223(D). That statute states that “[a]ny insurer failing to file an annual statement or to pay its fee pursuant to the provisions of this section is subject to payment of a penalty fee not to exceed twenty- five dollars for each day of delinquency.” 10. Petitioner presented an additional argument that because the audited report must be prepared by a certified public accountant, a person different than the one who prepares the bound annual statement of an insurer, the annual financial report has a different filing deadline than the annual statement, and because the fact that the penalty provision of A.R.S. §20-223(D) has existed for twenty years or more without change, the penalty provisions for the late filing of the annual statement should not apply to an audited financial statement. The Department asserts that by virtue of the 1991 amendment to A.R.S. §20- 223(A), the National Association of Insurance Commissioners’ (“NAIC”) instructions to the annual statement as addressed above, require a life, accident or health insurer to file an audited financial report by June 1 of each year. 12. Petitioner asserts that rather than assessing penalties under A.R.S. §20-223, the Department should have calculated the penalty under A.R.S. §20-220(B)(1), or proceed with disciplinary action. A.R.S. §20- 220(B)(1) provides for a penalty of up to $1,000.00 for each violation of A.R.S., Title 20, other than that which suspension, revocation or refusal is mandatory. Petitioner also asserts that the amount of penalty assessed against it amounts to approximately 2% of its net worth and is excessive in comparison to the small size of the insurer. 13. The applicable NAIC annual statement instructions provide, in part: “All insurers shall have an annual audit conducted by an independent certified public accountant and shall file an audited financial report as a supplement to the annual statement on or before June 1 for the year ended December 31 immediately preceding.” 14. The evidence of record establishes that Petitioner has a poor compliance history for filing audited financial statements with the Department. The evidence of record establishes that in 1995 and 1996, Petitioner did not submit audited financial statements to the Department. The evidence further shows that in 1997, Petitioner was delinquent in filing an audited financial statement and that such statement was filed on February 1, 1999. 15. On June 3, 1998, the Director of the Department suspended Petitioner’s certificate of authority because it failed to file an audited financial report for the year of 1995 and failed to file other required documents. Petitioner appealed the Suspension Order and a Notice of Hearing was issued by the Department. The hearing was vacated from the docket of the Office of Administrative Hearings based on the filing of a Notice of Settlement and Request to Vacate Hearing. Subsequently, Petitioner filed a Motion and Request to Reinstate Hearing resulting in a Notice to Reinstate Hearing being issued by the Director of the Department on December 21, 1998. As a result of settlement conferences being held by the parties, a Consent Order was issued by the Director of the Department wherein Petitioner represented that it would file annual statements, audited financial reports and other required filings by the required filing date. The Order states that Petitioner “shall make future filings, including…Annual Statements, Quarterly Statements, Audited Financial Reports…by the filing due date.” (emphasis added) 16. By citing the above-mentioned history, the Department maintains that the Department was justified in assessing the maximum penalty against Petitioner because it has exhibited a pattern of disregard for the filing due dates for audited financial statements and the Consent Order.

CONCLUSIONS OF LAW 1. According to Petitioner, the Legislature did not intend in A.R.S. §20-223 to provide a penalty for the late filing of any insert or supplemental filing, such as an audited financial statement, in connection with the annual statement of an insurer. Instead, Petitioner contends that the Legislature was concerned about the late filing of the annual statement that is required to be filed by March 31 of each year. Petitioner believes that the Legislature did not intend A.R.S. §20-223(D) be applied to the incidental, supplemental, or insert filings to the annual statement and that the penalty provisions of A.R.S. §20-220(B)(1) is the more appropriate statute that should have been applied in this instance. Additionally, Petitioner contends that pursuant to rules of statutory construction, as set forth in case law cited in Petitioner’s Hearing Memorandum, a court will not read into a statute more than the expressed intention of the Legislature based on the express language of the statute and that no liability (i.e. penalty) should be implied absent language to that effect. 2. The Department argues that the language of A.R.S. §20-223 expressly refers to the NAIC instructions for annual statements, that such instructions provide for the filing of the audited financial report to be not later than June 1, and that such filing is a supplement to the annual statement. The Department contends that the annual statement is not complete if it is not supplemented by an audited financial report in accordance with the NAIC instructions. According to the Department, in the event that the audited financial statement is not filed by June 1, the penalty provisions of A.R.S. §20-223(D) provide the Department with the authority to assess up to $25.00 for each day of delinquency. . . . 3. It is not for this tribunal to question the wisdom of the Legislature’s statutes but to make a determination as to their applicability with respect to the facts and issues at hand. The Legislature, knowing of the existence of the penalty provisions set forth in A.R.S. §20-223(D) relating to the late filing of an annual statement, amended that statute to incorporate the NAIC’s instructions as set forth in the above Findings of Fact. As such, the language of those instructions is deemed to be part of the Legislature’s directive. The instructions require insurers such as Petitioner to file an audited financial report by June 1. 4. Petitioner’s history with the Department establishes that it was well aware of the filing and deadline requirements for the audited financial statement and that Petitioner has repeatedly failed to meet those requirements. The history also establishes that Petitioner was aware that by failing to meet such deadline, it exposed itself to a penalty assessment for each day of delinquency not to exceed $25.00 per day. Given this history, Petitioner’s arguments as to the excessive nature of the penalty assessed are unpersuasive.[1] 5. Under the facts and circumstances presented at the hearing, Petitioner should be held accountable for its delinquent action and the evidence of record supports the determination that the Department acted appropriately in using its discretion in assessing a penalty in the amount of $3,325.00 for the late filing of Petitioner’s 1998 audited financial report.

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6. Petitioner fails to meet its burden of showing that the Department is without authority to assess penalties pursuant to A.R.S. §223(D) for the delinquent filing of Petitioner’s 1998 audited financial report, and Petitioner fails to show that the penalties assessed by the Department in that regard are excessive. RECOMMENDED ORDER Based on the above, the penalty the Department assessed against Petitioner for the delinquent filing of its 1998 audited financial report in the amount of $3,325.00 should be affirmed. Done this day, February 15, 2000

______________________________________ Lewis D. Kowal Administrative Law Judge

Original transmitted by mail this ____ day of ____________, 2000, to:

Department of Insurance Charles R. Cohen 2910 North 44th Street, Ste. 210 Phoenix, AZ 85018

ATTN: Curvey Burton

By ___________________________ ----------------------- [1] The fact that the penalty assessed by the Department amounts to 2% of Petitioner’s net worth has less to do with the amount of the penalty than it has with the fact that Petitioner, knowing that penalties accrue on a daily basis, waited until 133 days after the required deadline to file its audited financial statement.

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Office of Administrative Hearings 1400 West Washington, Suite 101 Phoenix, Arizona 85007 (602) 542-9826