Florida Specialty CEO Disputes State Regulator’s Claims, Says Insurer Not Insolvent

By | October 24, 2019

The head of recently shuttered Florida Specialty Insurance Co. says that claims by Florida’s insurance regulator that the company is insolvent are untrue.

The company’s CEO, Susan Patschak, argues Florida’s Office of Insurance Regulation liquidation and receivership order should be reversed and Florida Specialty instead should be placed into rehabilitation so its 90,000-plus policyholders can be given more time to find a new insurer.

However, policies are already being shifted to the private market or the state-run insurer of last resort and sources say it is unlikely that the process will be halted.

In an affidavit filed Oct. 8 in Leon County, Fla., Second Judicial Circuit Court, Florida Specialty Patschak disputes several allegations put forth by the Florida OIR, including that Florida Specialty engaged in “willful violations of the law,” and insists that the company is in fact solvent.

“With direct knowledge of the facts in this matter, I am compelled to provide facts to correct the OIR affidavit so that, to the extent required, the petition and resulting Order are founded upon accurate information,” the affidavit states.

Patschak claims the facts show that Florida Specialty was not insolvent as alleged by OIR and the company didn’t willfully violate Florida law or consent to the facts “developed for purposes of supporting the Petition or a finding of ‘insolvency.'”

She has requested that the court require the Florida Department of Financial Services to reconsider its petition.

“At best, as the board thought would be the case, the petition should be for the purposes of rehabilitation so that DFS can assess the true financial position of the company with respect to an accurate accounting of its liability,” Patschak states. “A case in rehabilitation will save FSIC’s 92,000 policyholders from having to find coverage for their homes during hurricane season.”

In her affidavit, Patschak points to the company’s June 30, 2019 financial statement showing its assets exceed what OIR stated.

Patschak’s affidavit says OIR had previously approved treating a $1.5 million fee payment to its affiliate Florida Specialty Managing General Agent (FSMGA) as an asset and not a liability. However, in its evidence of why Florida Specialty was insolvent, OIR stated the amount was a liability owed by Florida Specialty.

“[T]o remove the $1,500,000 is inconsistent and improper,” Patschak’s affidavit states. It also notes that the $1.5 million was reverted to the accounts of Florida Specialty without any residual claim to it by FSMGA, and OIR approved Florida Specialty’s claiming of the funds as an asset as of June 30, 2019.

“These facts cannot now be changed in order to achieve a different conclusion – that the company was ‘insolvent,'” the affidavit says. “As these funds did in fact revert to FSIC, they cannot now be subtracted from the accounts of the company.”

Patschak also calls out OIR’s assertion that her company was claiming more than $8 million in reinsurance assets that were in dispute by AIG/Lexington, stating that OIR had previously acknowledged correspondence explaining that Florida Specialty was not carrying the allowance as an asset for purposes of demonstrating solvency.

“The OIR understood my number as part of a cash flow projection, not as an asset on the balance sheet in our statement,” Patschak’s affidavit states, maintaining the discussion was related to how Florida Specialty’s cash flow could work in a runoff proposal.

OIR rejected Florida Specialty’s run-off plan that contained the figure, Patschak said, making it irrelevant “for any purpose.”

Patschak alleges the mischaracterization of the more than $8 million figure by media outlets has “disparaged me and all employees associated with the Florida Specialty companies.”

[Editor’s Note: Florida Specialty did not reply to Insurance Journal requests for comment at the time that DFS announced its liquidation move.]

Regarding a $1.4 million deferred tax asset that Florida Specialty reported in its June 30, 2019 statement and that OIR said put the company below the $10 million surplus threshold required by Florida law, Patschak said tax accountants determined the amount was an intercompany receivable because the net operating losses could be utilized by Florida Specialty’s affiliate FSMGA.

However, OIR’s decision to not allow FSMGA to partner with a third-party carrier “adversely affected FSMGA’s financial position,” and subsequently rendered the tax asset invalid. OIR also rejected FSMGA’s proposal to escrow up to $4 million over four years to “support any adverse development of loss reserves in the company” and pay for the use of the deferred tax asset.

“This rejection, by the OIR, reduced the financial security available to the policyholders of the company, which the OIR now uses in the OIR Affidavit,” Patschak’s affidavit states.

Patschak acknowledges a company must be declared insolvent for the Florida Insurance Guaranty Association to cover claims but says “the facts by which such an order is obtained must be accurate.”

She further claims that Florida Specialty complied with OIR’s consent order for administrative supervision filed early this year and agreed to work collaboratively with OIR. She contends a renewal rights agreement with its FSMGA affiliate was not a violation, as alleged by OIR, because OIR had no jurisdiction with that affiliate.

Patschak further disputes OIR’s claims that it “willfully violated Florida law” when it considered a renewal rights agreement between People’s Trust Insurance Co. and FSMGA that would have had FSMGA send non-renewal notices to certain Florida Specialty policyholders. Under the proposed agreement, People’s Trust would have offered those policyholders a policy until their Florida Specialty policy expired. Patschak’s affidavit states this proposal was filed with OIR, which the regulator acknowledged receiving, and she was never told it was in violation of the supervision consent order. Regardless, the proposal was not approved by OIR so Florida Specialty did not violate the law, the affidavit states.

Patschak disputes other allegations OIR detailed in its affidavit, and says the company consented to receivership by OIR to avoid a case being built by OIR and DFS against Florida Specialty that the insurer could then contest in a trial, which the company agreed was not the best use of its funds.

However, the Florida Specialty board “never consented to the facts asserted in the OIR Affidavit,” Patschak states, and “the board had not heard several of these indications before it saw them in the OIR Affidavit.”

DFS said it could not comment on Patschak’s response because it is an ongoing legal matter. OIR said the matter is being handled by the Florida Department of Financial Services’ Division of Rehabilitation and Liquidation.

“OIR is not going to comment on specific allegations, but clearly given the hazardous financial condition of this company, the OIR’s primary concern is to facilitate a solution which protects consumers and provides a mechanism for the guaranteed continued coverage and payment of existing policyholder claims,” the regulator said in a statement to Insurance Journal.

Several regulatory attorneys declined Insurance Journal’s request for comment on the matter.

Meanwhile, with Florida Specialty policies set to expire on Nov. 1, Florida Association of Insurance Agents (FAIA) President and CEO Jeff Grady said it is unlikely the liquidation process would be halted now as the process is “much too far along” at this point.

“The majority of policies have already been rewritten either by the private market or Citizens [Property Insurance Corp.],” he said in an email to Insurance Journal. The DFS liquidation order stipulated policyholders who could not find coverage in the private market could obtain coverage from Citizens, the state-run insurer of last resort.

Florida Specialty Insurance Co. CEO Susan Patschak Affidavit

About Amy O'Connor

O'Connor is the Southeast editor for Insurance Journal and associate editor of MyNewMarkets.com. More from Amy O'Connor

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