12-1004-11052-2

STATE OF MINNESOTA

OFFICE OF ADMINISTRATIVE HEARINGS

FOR THE COMMISSIONER OF COMMERCE

In the Matter of the Certificate of Authority of Capitol American Life Insurance Company, an Arizona Corporation, to do Business in the State of Minnesota, and its Officers and Directors

FIRST PREHEARING ORDER

This matter is before Administrative Law Judge Steve M. Mihalchick on various motions described below. Oral argument on the motions was held June 13, 1997, at the Office of Administrative Hearings.

Michael A. Sindt, Assistant Attorney General, 445 Minnesota Street, Suite 1200, St. Paul, Minnesota 55101-2130, appeared on behalf of the Department of Commerce (Department). Curtis J. Dickinson, Attorney at Law, Dickinson & Abel, 8900 Keystone Crossing, Suite 1095, Indianapolis, Indiana 46240, and Thomas E. Harms, Attorney at Law, Hessian, McKasy & Soderberg, 4700 IDS Center, 80 South 8th Street, Minneapolis, Minnesota 55402-2228, appeared on behalf of Capitol American Life Insurance Company, its officers and directors (collectively referred to as "Capitol American" or "Respondent").

Based upon the record herein and for the reasons set forth in the following Memorandum, the Administrative Law Judge makes the following:

ORDER

IT IS HEREBY ORDERED that:

1. The scope of this proceeding is defined by the allegations in the Order for and Notice of Hearing and Order to Show Cause (Order for Hearing) issued in this matter on March 26, 1997.

2. The Department may present relevant evidence in this matter beyond that which was in its possession prior to March 26, 1997.

3. The scope of discovery is limited to that which appears reasonably calculated to lead to admissible evidence relevant to the allegations in the Order for Hearing.

4. Respondent's Motion to Compel Answers to Interrogatories and Requests for Document Production by the Department is granted in part as follows:

a. The Department shall answer Interrogatories No. 1-20 in full.

b. The Department shall make the documents requested in Request for Document Production Nos. 6 and 7 available at the Department.

5. The Department's Motion to Compel Answers to Interrogatories by Respondent is granted in part as follows:

Respondent shall answer Commissioner's Interrogatories No. 1 through 9 in full and provide the documents requested in Request

No. 1.

6. The Department's Motion for a Protective Order regarding securing of Respondent's records during and after its corporate reorganization is denied.

7. Respondent's motion that the Department be required to consolidate the investigation regarding Charles Krieg with this matter is denied.

Dated this

2nd

day of

July

1997.

STEVE M. MIHALCHICK

Administrative Law Judge

MEMORANDUM

Events During Investigation

By letter of March 31, 1995, a Department investigator notified Respondent that the Department was reviewing Respondent's claim handling practices and marketing procedures for Minnesota policyholders and requested several pieces of information. The requested information related to Respondent's practices and procedures, primarily from January 1, 1993 through December 30, 1994. The letter also asked about Respondent's relationship with Inter-State Service, Inc. (Inter-State), which is Respondent's exclusive sales-marketing agent in Minnesota. The letter did not cite the statutory authority for the "review" or the request for information. Capitol American's Memorandum at [sic] Law Regarding Applicable Scope of Discovery (Respondent's Memorandum Re Scope), Ex. A.

By letter of June 13, 1995, Respondent's Manager of Regulatory Compliance wrote the investigator, stating that the information requested would be sent shortly and also "to confirm that this information will be accorded confidential treatment by the Department, pursuant to Insurance Code Section 60A.031, subdivision 4, (f)." The letter went on to state that Respondent was particularly concerned that the contract between it and Inter-State not be made public to the extent possible. Respondent's Memo Re Scope, Ex. C.

By letter of September 5, 1996, the Department notified Respondent that it had completed its "review" and that the "investigation" concluded that Respondent had "violated Minn. Stat. chs. 60A, 60K, 72A (1994) and Minn. R. ch. 2790 (1995)." The letter referred to an enclosed Consent Order saying that Respondent could resolve the matter and voluntarily waive its right to a formal hearing by executing the Consent Order. The letter also stated that if Respondent wished to oppose the "proposed action by the Department", it had a right to a contested case hearing before an Administrative Law Judge. The letter did not state what the "proposed action" was, but stated that the Department would withdraw the offer made in the Consent Order, set forth its findings and allegations in a statement of charges issued with an Order for Hearing, and that the proposed sanctions would not necessarily be the same as those offered in the Consent Order. The letter requested a response within seven days. Respondent's Memo Re Scope, Ex. B.

On September 18, 1996, a meeting was held between the Department and Respondent. At that meeting, the Department provided Respondent with copies of the documents in its investigative file, which filled four boxes. On September 30, 1996, Respondent's counsel wrote the Department's counsel tendering a proposed Consent Order for the Department's consideration. The letter claimed that Respondent had already implemented a compliance program that addressed all of the subjects listed in the Department's proposed Consent Order, complained about the lack of specific factual references to support the broad and vague allegations and made a counter proposal on the amount and description of the penalty it was to pay. Respondent's Memo Re Scope Ex. D. On October 3, 1996, the Department, by a letter from Gary A. LaVasseur, Deputy Commissioner, responded with another proposal which was represented to be its final position on terms for settlement of the matter. Respondent's Memo Re Scope, Ex. E. On October 11, 1996, the Department transferred the matter to the Attorney General's office to initiate the hearing process. Respondent's Memo Re Scope, Ex. F.

Respondent's counsel wrote Deputy Commissioner LaVasseur, through the Department's counsel, on October 28, 1996. Respondent's Memo Re Scope, Ex. G. The letter was still seeking a mutual resolution of the matter and was in response to a letter of October 17, 1996, from Deputy Commissioner LaVasseur that is not part of the record. The letter expressed again the concern regarding lack of specificity on the Department's allegations. It also argued that all examinations and investigations of insurance companies must be conducted under Minn. Stat. § 60A.031, specifically, its requirements of confidentiality and to issuance of a report to the company.

By letter of November 27, 1996, Deputy Commissioner LaVasseur responded to the letter of October 28, 1996. Commissioner's Memorandum as to Scope of Discovery in Administrative Hearing (Commissioner's Memo Re Scope) Ex. 2. He explained that an examination or insurance examination under Minn. Stat. § 60A.031 is a regular examination conducted at least once every five years by the Department's Insurance Financial Examiners at the Company's home office of the Company's books, records, policies and procedures and concentrates on reviewing details reflecting the financial stability of the Company. The letter then contrasted such an examination with the "investigation" of Respondent, stating:

The above referenced file represents a focused investigation by the Enforcement Division and relates to specific alleged violations of Minnesota insurance law. Based on your knowledge and background in the insurance industry, I am surprised that you failed to recognized [sic] the difference between an enforcement investigation conducted pursuant to Minn. Stat. § 45.027 (1994) and a insurance examination conducted pursuant to Minn. Stat. § 60A.031 (1994). In addition, Investigator Johnson has informed me that, after receiving Mr. Burdett's letter regarding production of the required investigative data and referencing Minn. Stat. § 60A.031 (1994), he contacted Mark Burdett and specifically informed him that our Department would not agree to guarantee confidentiality for any required information. Especially when the Minnesota Data Practices Act requires such investigative data, under certain circumstances, to be made available to the public.

As I mentioned in my earlier correspondence and as subsequently confirmed by Assistant Attorney General Sindt, the purpose of our meeting on September 18, 1996 was to provide you with general information regarding the nature and types of violations identified by the Department during its investigation. It is not routine for the Department to provide a formal statement of charges at that stage of the process. In fact, in most cases, the Department will notify the Insurer of the findings of our investigation and our intent to initiate formal disciplinary action. If the insurer and/or agent declines to resolve the issues informally by means of a Consent Order, a Statement of Charges is issued and the matter is scheduled for a hearing before an Administrative Law Judge. Obviously, if the respondent elects to proceed to a contested case hearing they are afforded all the protections of due process in accordance with Minnesota law.

Although I find your continuing assertions that you have not been provided with adequate information to reasonably determine your client's liability for violating Minnesota Statutes and Rules to be both frustrating and troubling, I am once again, providing you with a summary of the items (violations) previously discussed at our meeting of September 18, 1996. Please note that this is not an all inclusive list of all violations that will be specifically addressed in the Statement of Charges. However, to determine the magnitude of your client's exposure for civil penalties you could multiply the number of times your agent's [sic] engaged in such conduct/transactions times $2,000. As an example, if your agents followed their training and failed to identify themselves as insurance agents or the company they represent when soliciting potential Minnesota clients, each such failure could subject your client to a $2,000 civil penalty. Hopefully, the summary will provide you with sufficient information for determining why the Department believes its prior settlement offers to be more that [sic] reasonable.

It is the view of the Department that Respondent was investigated by its Enforcement Division pursuant to Minn. Stat. § 45.027 under the general powers of the Commissioner of Commerce and that the investigation was not an examination under Minn. Stat. § 60A.031 and, therefore, no examination order was ever issued, no examination report was ever issued and Respondent was never billed for an examination, all as required by Minn. Stat. § 60A.031. Affidavit of Gary A. LaVasseur, Commissioner's Memo Re Scope, Ex. 3.

On December 23, 1996, the Department and Inter-State agreed to the entry of a Consent Order regarding the allegations that it had recruited and trained insurance agents for Respondent in Minnesota that were involved in violations of the insurance statutes and rules. Inter-State was granted an agency license. Respondent's Memo Re Scope, Ex. H.

On March 7, 1997, the Department's counsel sent Respondent's counsel a letter enclosing a revised Consent Order and a proposed Order for and Notice of Hearing and Order to Show Cause. Respondent's Memo Re Scope Ex. I. Confirming a discussion of the prior day, the letter stated that Respondent would be allowed until March 12, 1997, at 12:00 noon to agree to the terms of the proposed Consent Order or the Commissioner and Department would seek revocation of Respondent's Certificate of Authority and up to the maximum possible civil penalty for the 5,325 separate violations outlined in the Order to Show Cause. By letter of March 12, 1997, Respondent's counsel wrote the Department's counsel thanking him for the changes to the Consent Order that had been requested by Respondent, stating that while the Department had provided some additional information, its continuing reliance on broad sweeping allegations meant that in the absence of what it considered a factual basis to support the allegations, Respondent could not be expected to pay the amount demanded, and requesting again that Respondent be granted access to the information which supported the allegations contained in the draft Order to Show Cause. Respondent's Memo Re Scope, Ex. K.

Contested Case Proceedings

On March 26, 1997, the Department issued the Order for and Notice of Hearing and Order to Show Cause (Order for Hearing) in this matter, thereby commencing this contested case. Commissioner's Memo Re Scope Ex. 1.

The Order for Hearing starts with 19 mostly factual allegations concerning Respondent, its relationship with Inter-State, the recruitment and training practices of agents hired to sell Respondent's products, the marketing techniques the agents used in accordance with their training, the applications, brochures and presentations used by the agents, and other actions by Respondent and Inter-State. Some of the factual allegations also contain allegations that the practices violate certain cited statutes or rules.

Following the factual allegations, the Order for Hearing sets forth 21 counts of violations. The last four counts are new, otherwise the Order for Hearing is virtually identical to the proposed Order for Hearing sent to Respondent's counsel by the Department's counsel on March 7, 1997. The first six counts allege that Respondent, acting through its agents, trained at least 165 insurance agents to conduct business in Minnesota and that Respondent failed to instruct those agents to comply with various requirements imposed upon insurance agents. All but one of these counts appears to be based upon one or more of the factual allegations made earlier in the Order for Hearing, the only exception being Count VI regarding misuse of the Certificate of Authority. Each of the counts cites a rule or statute and describes the violation in terms paraphrasing the cited rule or statute. These violations are:

1. Count I alleges at least 165 violations of Minn. Stat. § 60K.14, subd. 1(b), which requires agents to clearly identify themselves, whom they represent and that they are selling insurance.

2. Count II alleges at least 165 violations of Minn. Stat. §§ 60K.14, subd. 4 and 72A.20, subd. 34, which requires agents to have reasonable grounds for believing the policy they are recommending to a buyer is suitable for that buyer.

3. Count III alleges at least 165 violations of Minn. Stat. §§ 72A.19 and 20, in that Respondent "failed and neglected to instruct its agents to refrain from and, in fact, trained, ordered and directed them to engage in insurance sales techniques which violate Minnesota laws, including conduct which constitutes unfair or deceptive trade acts or practices within the meaning of Minn. Stat. § 72A.20.

4. Count IV alleges at least 165 violations of Minn. R. 2790.0400, subp. 3, which was probably intended to refer to subp. 8, which requires the disclosure of policy limitations associated with any policy benefit that is presented.

5. Count V alleges at least 165 violations of Minn. Stat. § 60K.14, subd. 1(b), and Minn. Rules 2790.0400, subp. 3 and 2790.0800, which require clearly identifying the product as insurance.

6. Count VI alleges at least 165 violations of Minn. R. 2790.1100 which prohibits representations implying approval by the state by failing to instruct its agents that they are prohibited from referring to this Certificate of Authority to do business in Minnesota except in response to a specific inquiry about licensure.

7. Count VII alleges at least 165 violations of Minn. Stat. §§ 60K.14, subd. 6, and 72A.501 and Minn. R. 2790.0900, which prohibit use of endorsements without certain disclaimers and use of other buyers' names without permission.

8. Count VIII alleges that from the spring of 1990 through December 1994, through agents or employees, Respondent induced at least 165 persons to become sales representatives through false statements and omissions of fact regarding potential income, conditions of work and other matters. It alleges that such false representations by Respondent constitute at least 165 violations of Minn. Stat. §§ 181.64, 181.65, and Minn. Stat. § 60K.11[subd. 1](iii) and (x).

9. Counts IX through XIII allege that on March 7, 1995, Respondent entered into settlement agreements with five different states to resolve allegations about the conduct of insurance business in those states under which it paid a forfeiture, fine or civil penalty to each state. The allegation refers to the fact that the Commissioner may impose discipline on an insurer under Minn. Stat. § 60A.052 if the insurer has paid a monetary penalty or fine to another state. The Order for Hearing does not allege that this is a "violation" of Minnesota law for which a fine may be imposed under Minn. Stat. § 45.027, subd. 6.

10. Count XIV of the Order for Hearing restates that Respondent issued a minimum of 5,000 insurance policies in Minnesota prior to December 1996 for which it paid commissions to Inter-State, which until that date was an insurance agency without a Minnesota license and that, thereby, Respondent committed at least 5,000 violations of Minn. Stat. § 60K.14, subd. 3, which prohibits any person, firm or corporation from paying a commission to an unlicensed insurance agent.

11. Counts XV through XVIII relate to violations allegedly committed in connection with the issuance of at least 1,000 insurance policies in Minnesota during some period prior to December 1, 1996. These allegations are:

a) Count XVIII alleges at least 1,000 violations of Minn. R. 2790.0500, subp. 8, in that brochures used by its agents did not disclose policy limitations.

b) Count XVI alleges at least 1,000 violations of Minn. R. 2790.0600 in which the brochures used by the agents did not make required disclosures concerning exceptions, reductions and limitations to dollar amounts payable.

c) Count XVII alleges at least 1,000 violations of Minn. R. 2790.2100, which requires every insurer agent and agency to maintain a system of control over the content of advertisements and representations, for not establishing and maintaining such a system of control.

d) Count XVIII alleges at least 1,000 violations for engaging in advertisement of false statements in violation of Minn. Stat. § 72A.20, subd. 2, for false statements in Respondent's "Comp-Care" policy that falsely indicated that the anticipated loss ratio for the policy was in excess of 50 percent.

e) Count XVIX alleges that Respondent and Inter-State threatened an agent in a letter to cease payment of earnings due the agent if he continued to talk to the Department of Commerce, in violation of Minn. Stat. § 72A.20, subd. 20.

f) Count XX of the Complaint alleges that the same conduct also constitutes a violation of Minn. Stat. § 60K.11, subd. 1(x). That statute allows the Commissioner to take disciplinary action against an insurance agent if that agent has engaged in any fraudulent, coercive, deceptive, or dishonest act or practice.

g) Count XXI alleges that in at least 1,000 insurance policies issued by Respondent in Minnesota, its agents failed to disclose in its policies the limitation of coverage by the Life and Health Guarantee Association in violation of Minn. Stat. § 61B.28, subds. 7 and 8. (Minn. Stat. § 61B.28, subd. 7(a) requires that such disclosures be made in a notice given at the time of application.)

The Order for Hearing contained the following Notice:

NOTICE

RESPONDENT IS HEREBY GIVEN NOTICE OF THE INTENTION OF THE COMMISSIONER TO SEEK, UPON HEARING AND PROOF, THE MAXIMUM PENALTY PROVIDED BY LAW FOR THE VIOLATIONS ALLEGED IN THE FOREGOING NOTICE OF AND ORDER FOR HEARING AND ORDER TO SHOW CAUSE. THE ALLEGATIONS CONTAINED IN THE FOREGOING, IF SUPPORTED BY CREDIBLE EVIDENCE, WOULD REPRESENT A PATTERN AND PRACTICE OF THE RESPONDENT TO AFFIRMATIVELY AND SYSTEMATICALLY VIOLATE AND IGNORE THE INSURANCE REGULATORY LAWS, RULES, AND REGULATIONS OF THE STATE OF MINNESOTA. THE PENALTY SOUGHT MAY INCLUDE BUT IS NOT LIMITED TO REVOCATION OF CERTIFICATE OF AUTHORITY TO ENGAGE IN THE INSURANCE BUSINESS IN THE STATE OF MINNESOTA AND $2,000 CIVIL PENALTY FOR EACH INDIVIDUAL VIOLATION OF THE LAWS, RULES AND REGULATIONS RELATING TO THE BUSINESS OF INSURANCE IN THE STATE OF MINNESOTA.

Under Minn. Stat. § 60A.052, subd. 1, the Commissioner may impose discipline against an insurer, including a civil penalty as provided for in Minn. Stat. § 45.027, subd. 6. That section allows the Commissioner to impose a civil penalty not to exceed $2,000 per violation for violation of any law, rule, or order. Other than the five instances of paying penalties in other states which are not cited as "violations" in the Order for Hearing, the Order for Hearing alleges "at least" 11,322 separate violations. At the maximum of $2,000 each, that is a total in civil penalties of "at least" $22,644,000.

Discovery

On April 7, 1997, Respondent served Capitol American's First Set of Interrogatories Propounded to Commissioner of Commerce and Capitol American's Request for Production of Documents to Commissioner of Commerce. Capitol American's Motion to Compel Discovery (Respondent's Motion to Compel) Ex. A.

Respondent's Interrogatories contained 26 individual interrogatories. The first 21 interrogatories were all in the same form; they referred to specific paragraphs or counts and then requested that the Department:

(a) state each fact upon which you rely to support your contention;

(b) identify each person known or believed by you to possess any information relating to such allegation;

(d) identify each document relating to or evidencing such contention.

The remaining interrogatories requested identification of witnesses, expert witnesses, persons having knowledge of any of the facts or issues in this matter, individuals in the Department involved in the matter, and persons who prepared the answers to the interrogatories.

On April 15, 1997, the Commissioner served its Request for Production of Documents and Interrogatories on Respondent. The Commissioner's requests included nine interrogatories, most of which requested information for the time period January 1, 1992 through December 1, 1996. The request for documents requested copies of all documents that would substantiate any of the answers provided to the interrogatories.

On May 9, 1997, the Department served its Answers to First Set of Interrogatories. Respondent's Motion to Compel at 2. Some corrections were made and an Amended Answers to First Set of Interrogatories was served on Respondent's counsel on May 13, 1997. Respondent's Motion to Compel, Ex. B (also Respondent's Memo Re Scope, Ex. J). The Answers to the first three interrogatories were as follows:

INTERROGATORY NO. 1:

With respect to the contentions related to improper recruiting procedures by Capitol American, its agents and employees and/or Inter-State, its agents and employees as referenced by ¶ 2 of the Division's Order to Show Cause,

(a) state each fact upon which you rely to support your contention;

(b) identify each person known or believed by you to possess any information relating to such allegation;

(d) identify each document relating to or evidencing such contention.

ANSWER: This interrogatory does not relate to paragraph 2 of the Order to Show Cause as referenced. The Commissioner cannot answer this nonsensical interrogatory.

INTERROGATORY NO. 2:

With respect to the contention of improper or inadequate supervisory control as referenced by ¶ 3 of the Division's Order to Show Cause,

(a) state each fact upon which you rely to support your contention;

(b) identify each person known or believed by you to possess any information relating to such allegation;

(d) identify each document relating to or evidencing such contention.

ANSWER: This interrogatory does not relate to paragraph 3 of the Order to Show Cause as referenced. The Commissioner cannot answer this nonsensical interrogatory.

INTERROGATORY NO. 3:

With respect to the contention regarding scripted sales presentations as referenced by ¶ 4 of the Division's Order to Show Cause,

(a) state each fact upon which you rely to support your contention;

(b) identify each person known or believed by you to possess any information relating to such allegation;

(d) identify each document relating to or evidencing such contention.

ANSWER: The Commissioner objects to this interrogatory as overbroad and obtainable from some other sources that are more convenient, less burdensome, and less expensive to the Commissioner. Pursuant to Rule 33.03, the records which have been provided to Respondents are such that the burden of deriving or ascertaining the answer is substantially the same for both parties. Thus, under Rule 33.03, the Commissioner will note the documents from which the Respondents may ascertain their answer. Documents to be noted are the scripted sales presentations in the file. The Commissioner is not able to respond further to this interrogatory due to the current early stage of the discovery process.

The Answers to Interrogatories 4 through 21 were similar. With respect to Respondent's Request for Production of Documents, the Answer referred to the fact that the Commissioner had previously provided Respondent with a complete set of all non-privileged documents in its file in the case.

In its Request for Production of Documents, Respondent also requested any and all documents regarding closed investigations performed by the Department in the past 10 years relating to the types of violations alleged in the Order for Hearing. Request for Document Production Nos. 10-26. The Commissioner's Answers objected to those requests as outside the scope of discovery, overbroad and unduly burdensome and costly.

On May 16, 1997, Respondent served its Capitol American's Responses to Request for Production of Documents and Interrogatories upon the Commissioner's counsel. The response to Interrogatory No. 2 was as follows:

INTERROGATORY NO. 2

Identify and list the names and addresses of all agents that Respondent or Respondent's Agent trained prior to December 1996 who were licensed in the State of Minnesota as insurance agents.

RESPONSE TO INTERROGATORY NO. 2:

Capitol American objects to this interrogatory on the grounds that it seeks information beyond the lawful scope of the issues of this action as defined by Minnesota law. In further support of this objection, the investigation upon which this action is based and defined began on May 31, 1995 pursuant to a letter notice to Capitol American by Mr. Lonnie Johnson, Senior Investigator for the Department of Commerce. Following the May 31, 1995 letter, Capitol American provided answers and documents to numerous Department requests. The investigation concluded by virtue of a September 5, 1996 letter from Mr. Johnson. In announcing the conclusion of the investigation on September 5, 1996, Mr. Johnson tendered a proposed Consent Order and Stipulation for the Company's consideration. The letters of May 31, 1995 and September 5, 1996 are attached hereto as Exhibits A and B.

This interrogatory seeks (a) information not already in the possession in the Commissioner or (b) more than simple corroboration of materials already in the possession of the Commissioner, and accordingly exceeds the legitimate scope of this proceeding. Under Minn. Stat. § 60A.052 this action cannot be commenced unless: "The Commissioner determines that one of the conditions listed in subdivision 1 exists. . . ." As such, the legitimate scope of discovery in this action should not go beyond acts already known to the Commissioner upon which this Order to Show Cause is based.

Capitol American further objects on the ground that the Commissioner has failed to specify the exact nature and scope of the allegations underlying the Order to Show Cause in response to Capitol American's initial discovery request which sought the particulars of any factual basis upon which the Commissioner relied in making its allegations. Capitol American is thus wholly unable to assess the relevancy or materiality to these requests either as to time or subject matter.

Capitol American further objects on the grounds that the Commissioner has taken the position that all of the facts upon which the Order to Show Cause is based are located in documents supplied to the Commissioner by Capitol American. Capitol American disputes this assertion and is bringing a Motion to Compel Answers to that Discovery. However, to the extent even partially true, that representation means that compelling Capitol American to reproduce information already in the possession of the Commissioner and upon which this claim is based is unduly burdensome. This discovery places an unfair burden upon Capitol American to provide duplicate material, which is not commensurate with the Commissioner's legitimate discovery needs.

Capitol American further objects on the ground that any information related to actions of Inter-State is immaterial to this proceeding because any allegation related to Inter-State and its relationship to Capitol American has been settled and finally and ultimately resolved for the benefit of both Inter-State and Capitol American pursuant to the Consent Order between the Department and Inter-State executed on December 23, 1996.

Pursuant to the Court's verbal ruling on Tuesday, May 13, 1997, the parties will be briefing the issues regarding the scope of these proceedings and the Commissioner's failure to respond to the discovery of Capitol American. Oral argument will be heard June 12, 1997. The issue regarding the scope and dispositive effect of the December 23, 1996 Consent Order will be submitted to the Hearing Officer in a separate dispositive motion scheduled pursuant to the April 9, 1997 determinations of the Hearing Officer.

The remaining interrogatories were answered by referring to this Response to Interrogatory No. 2.

On May 30, 1997, both parties filed Motions to Compel Discovery seeking orders requiring each other to respond to all the discovery requests.

Scope of the Hearing and Discovery

A contested case hearing is commenced by the service of a Notice of and Order for Hearing by the agency. Minn. R. 1400.5600, subp. 1. The Notice of and Order for Hearing is required to contain, among other things, a citation to the agency's statutory authority to hold the hearing and to take the action proposed, and a statement of the allegations or issues to be determined together with a citation to the relevant statutes or rules allegedly violated or which control the outcome of the case. Minn. R. 1400.5600, subp. 2, Minn. Stat. § 14.58. That statute also provides that if subsequent amendments of the issues are necessary, they shall be fully stated as soon as practicable and an opportunity shall be afforded to all parties to present evidence and argument with respect thereto. That provision is amplified in Minn. R. 1400.5600, subp. 5, which provides:

At any time prior to the close of the hearing, the agency may file and serve an Amended Notice of and Order for Hearing, provided that, should the Amended Notice and Order raise new issues or allegations, the parties shall have a reasonable time to prepare and meet the new issues or allegations if requested.

Under the specific authority of Minn. Stat. § 60A.052, subd. 2, if the Commissioner determines that grounds exist for taking disciplinary action, the Commissioner may issue an order requiring the insurance company to show cause why the disciplinary action should not occur and the order must give reasonable notice of the time and place for the hearing and state the reasons for the entry of the order.

Under the foregoing statute and rules, the scope of the hearing is determined by the allegations made in the Notice of and Order for Hearing, assuming, of course, that the subject matter of the allegations is within the jurisdiction of the agency. In this case, there is no citation in the Order for Hearing to the Commissioner's statutory authority to hold the hearing and take the proposed disciplinary action. There is a statement that the hearing is ordered "Pursuant to Minn. Stat. § 326.921, subd. 1(b) (1996)." Order for Hearing at 18. That is an erroneous reference to nonexistent subdivision of a statute that deals with other occupations licensed by the Commissioner of Commerce. The Commissioner's authority to take disciplinary action against an insurance company and to order a contested case hearing arises under Minn. Stat. § 60A.052. The Commissioner also has general authority under Minn. Stat. § 45.027 to conduct investigations, hold hearings, and impose sanctions against persons holding authorities or licenses from the Commissioner. These statutes are cited and quoted at length in the Commissioner's Memo Re Scope at 2-5.

Respondent argues that the scope of this matter and the scope of discovery are defined by the scope of the prehearing investigation. It also argues that the prehearing investigation was subject to the requirements of Minn. Stat. § 60A.031, which relates to examinations. Thus, Respondent argues, the scope of discovery in these proceedings should be limited to the facts known to the Commissioner at the time the Order for Hearing was filed. Respondent's Memorandum Re Scope.

Analysis of Minn. Stat. Ch. 60A shows that examinations of insurance companies under Minn. Stat. §§ 60A.03 and 60A.031 are separate and distinct from disciplinary actions against insurance companies under Minn. Stat. § 60A.052. Nothing in Minn. Stat. § 60A.052 specifies the source of the information upon which the Commissioner must rely in order to issue an Order to Show Cause to an insurance company. In particular, nothing requires that it be based on an examination under Minn. Stat. § 60A.031. It is possible to imagine that an examination may be the source of the information, but it could just as well be based on information from a separate enforcement investigation or, less likely, reports from other states, records of criminal convictions, or citizen complaints. The practice of the Department in maintaining insurance company examinations separate from enforcement investigations, as described in Deputy Commissioner LaVasseur's letter of November 27, 1996 (Commissioner's Memo Re Scope, Ex. 2), is entirely consistent with the statutory scheme. Therefore, none of the requirements of Minn. Stat. § 60A.031 relating to examinations apply to the enforcement investigation that was done in this matter, nor do they apply to this disciplinary proceeding under Minn. Stat. § 60A.052.

The fact that Respondent attempted to bring itself under the provisions of Minn. Stat. § 60A.031 does not change this result. It might have been preferable had the investigator stated the statutory authority under which he was operating from the start and had responded in writing to Respondent's claims of confidential treatment under Minn. Stat. § 60A.031. But that failure does not change the statutory scheme. Moreover, Respondent did nothing in reliance on its misunderstanding, or calculated position, that it was not required to do anyway. There was no prejudice to Respondent. Again, there is no reason to make the requirements of Minn. Stat. § 60A.031 into procedural prerequisites for the hearing in this matter.

The investigation in this matter focused on Respondent's recruiting and training practices, which apparently were carried out entirely by Inter-State, during the time period from January 1, 1993 through December 30, 1994. Respondent and Inter-State claim to have corrected all the concerns by 1996, except for Inter-State's nonlicensure. The Consent Order of December 23, 1996, between Inter-State and the Commissioner contained wording (apparently negotiated by Inter-State because it is the same as Respondent attempted to negotiate in this matter), requiring Inter-State to continue to operate under its corrected policies and procedures. Respondent intends to argue in a subsequent motion that the Inter-State Consent Order requires dismissal of many of the counts in this matter, but at this point it argues that the Inter-State Consent Order shows that all areas of concern identified in the Commissioner's investigation had been addressed prior to August 27, 1996. Thus, Respondent argues, the scope of this matter and of discovery must be limited to the time period prior to August 27, 1996, or certainly prior to December 23, 1996, when the Inter-State Consent Order was signed. Respondent's Memo Re Scope at 9-10.

The Order for Hearing, in general, contains fairly specific allegations as to the underlying facts and statutes or rules alleged to be violated. It meets the notice requirements of Minn. Stat. § 14.58 and Minn. R. 1400.5600, subp. 2. It has been stated that the general principle applied in administrative hearings is "notice pleading," which requires that a complaint provide sufficient notice of the charges, that agency pleading is sufficient if the Respondent understands the issue and is afforded a full opportunity to justify its conduct during the course of the hearing, and that any deficiencies in the pleadings can be corrected during discovery or at the prehearing conference. Koch, Administrative Law and Practice, § 5.5 (1985). The Order for Hearing also meets that standard. Nonetheless, there are several vague matters in the Order for Hearing that need to be addressed. One of those is the matter raised by Respondent's argument: What are the dates the alleged violations occurred? The Order for Hearing is silent as to dates except for an allegation in Count VIII that it induced the at least 165 persons to become sales representatives from the spring of 1990 through December of 1994, that on March 7, 1995, it entered into settlement agreements with the five states, and that prior to December 1, 1996, or from January 1, 1993, to December 1, 1996, Respondent issued at least 1,000 insurance policies.

While the Department may allege any violations of the insurance statutes and rules, once the hearing process has been commenced, Respondent is entitled to know the basis for those allegations, including the dates the violations were alleged to have occurred. The vagueness in dates may be corrected in a number of ways, including amendment of the Order for Hearing, a more specific statement of charges, or by responding to the discovery requests asking for the basis for each of the allegations. In this case, the Department will be required to respond to the interrogatories requesting the basis for each of the allegations.

Respondent also argues that Minn. Stat. § 60A.052, subd. 1, requires that the Commissioner "must find" certain facts prior to taking enforcement action and that Minn. Stat. § 60A.052, subd. 2, requires the Commissioner to "determine that one of the conditions listed in subdivision 1 exists," before issuing an Order for Hearing. Thus, Respondent argues, the Commissioner must have already had the supporting facts at the time the Order for Hearing was issued and may not use discovery to build an undeveloped case. Respondent also argues that the Commissioner must demonstrate that he had prima facie evidence to support the issuance of the Order for Hearing and that Respondent is entitled to know what that evidence is before it is required to provide answers to discovery requests to the Commissioner. Respondent's Memo Re Scope at 17-18.

The Department acknowledges the requirement of Minn. Stat. § 60A.052, subd. 2, that prior to the issuance of an Order for Hearing the Commissioner must have determined that one of the conditions listed in subdivision 1 exists, but then goes on to state: "In this case clearly the Commissioner has found grounds under subds. 1(9) and 1(11)". Of course, that is not so "clear." The Department then argues that this case is like any other contested case and that the rules allow discovery by the agency and the amendment of the Order for Hearing, including the addition of new issues or allegations, as long as the other parties are guaranteed reasonable time to prepare to meet the new issues or allegations. Commissioner's Memo Re Scope at 7-8.

Respondent is correct to the extent that Minn. Stat. § 60A.052, subd. 2, by its requirement that the Commissioner "determine" that one of the grounds for discipline exists prior to the issuance of an order to show cause, and its requirement that the Order state the reasons for its entry, establishes procedural requirements that must be met by the Commissioner. This statute, and due process, require that the Commissioner have some basis for making the allegations. Given the detail in the Order for Hearing here, it seems very unlikely that any of the allegations were created without some reasonable basis. Nonetheless, Respondent is entitled to discovery on the issue and entitled to know the specific basis upon which the allegations were made so that it can attempt to show that there was no basis for one or more of the allegations, if that was the case, and bring a motion to strike. On the other hand, there is no need to delay the proceedings in any respect, including delaying Respondent's obligation to provide discovery responses, because of this potential issue. Respondent is also entitled to know the basis for the Department's allegations so that it can defend itself. The general allegations given so far are inadequate.

Respondent is also correct that it is not appropriate for the Commissioner to issue an Order for Hearing containing only generalized allegations and then use the discovery process to build a case and make wholesale amendments to the Order for Hearing. Just as in civil proceedings, discovery in administrative proceedings must be designed to lead to relevant evidence and relevancy is determined by the scope of the pleadings. Minn. Stat. §§ 14.58 and 60A.052, subd. 2, contemplate that the great majority of the allegations and substantial supporting evidence will be known at the time the Order for Hearing is issued. Ongoing investigation and discovery may add to the evidence available and amendments to the Order for Hearing will be allowed, but fair notice and efficient process require that changes be the exception, not the rule. Orders for Hearing were not designed to be positional bargaining tools.

To summarize the foregoing discussion, Respondent is entitled to discovery of the Department's evidence and theories that formed the basis for the allegations made in the Order for Hearing, both at the time the Order for Hearing was issued and up to the date of the hearing, as additional evidence may be gathered by the Department. The Department is not limited to presenting the evidence that was in its possession at the time the Order for Hearing was issued and may continue its investigation and discovery in order to supplement the evidence regarding the allegations already made and, if appropriate, amend the Order for Hearing to include additional allegations. Moreover, the Department is entitled to discovery regarding events subsequent to the dates the alleged violations actually occurred, because such discovery may lead to evidence that bears on proof of the violations corrective actions by Respondent, or other facts relevant to the appropriate sanctions.

Respondent's Motion to Compel

In Interrogatory No. 1, Respondent referred to paragraph 2 of the Order for Hearing and paraphrased it to include an allegation of improper recruiting procedures which does not appear in paragraph 2. It then asked its standard "basis" or "contention" interrogatories regarding the allegation. The Department replied that it could not answer this "nonsensical" interrogatory. While the paraphrasing of paragraph 2 was inaccurate, Respondent is entitled to know the specific basis that the Department had to make the allegations in paragraph 2, as discussed above. The Department should answer the question with an introductory statement such as "With respect to the allegations made in paragraph 2, . . .." It could also point out where it disagrees with the form of the interrogatory. But in any event, Interrogatory No. 1 is clear enough to answer. The same comments apply to Interrogatory No. 2.

With respect to Interrogatory No. 3, the interrogatory refers to paragraph 4 of the Order for Hearing which alleges that Respondent required its agents to adhere to scripted sales presentations. The Commissioner objected to the interrogatory overbroad and obtainable from the four boxes of records that had previously been provided to Respondent. It noted that the scripted sales presentations were in that file. The Department's answer is inadequate. It doesn't answer the question asked, which is to state the basis for the contentions made in paragraph 4 by stating the facts relied upon, the identity of persons with information regarding the allegation, the identity of communications regarding the contention and the identity of documents relating to the contention. When the Department has produced an Order to Show Cause that seeks over $22,644,000 in penalties, it is very unlikely that there is any discovery request that directly relates to the allegations that can be considered overbroad and burdensome. Moreover, simply stating that there are documents in the four boxes somewhere that contain the evidence is inadequate. The Department must specifically identify the documents which it believes contain evidence that support its contentions. Stating that the scripted sales presentations in the file are the documents is helpful, but inadequate and not sufficiently detailed. The answer must identify which specific document or documents the Department is referring to. The Department does not have to provide another copy, but Respondent must be able to find the referenced documents in the file already provided. These same comments apply to Interrogatories 4 through 21. The answers to Interrogatories Nos. 21 through 26 are adequate as given.

With regard to the Department's responses to Requests for Document Production, the answers to Requests 1 through 5 appear adequate at the present time. Request 6 requests all forms, instructions, manuals, worksheets and the like which relate to the investigation of Respondent. Request No. 7 asks for the same documents with regard to the "review of policies performed by the Department" of Respondent. The answer given to both interrogatories was:

"The Commissioner has provided the requested documents to Respondent when they received a copy of the file. Any other documents requested are public and must be requested by Respondent through proper channels."

The fact that a document is public does not mean that it cannot be requested through discovery in a contested case. However, while the Department has not made such an objection, producing these documents at Respondent's counsel's office may make the request overbroad and overburdensome. The evidence sought is not directly related to the allegations. Many of the forms and manuals will contain materials not related to investigation at all. Respondent should be allowed to review the requested documents at the Department and may then select what it needs to copy.

In Request Nos. 8 and 10 through 26, Respondent asks for any and all documents related to any other regulatory actions or investigations of other carriers in Minnesota for the same charges that have been raised against Respondent. The Department objects to these requests as outside the scope of discovery, overbroad, and unduly burdensome and costly. It states that Respondent is free to review the public file of actions taken by the Department. The Department's response is adequate and reasonable. While Respondent is certainly entitled to information regarding similar actions and investigations undertaken by the Department previously, again, this is evidence that is not related directly to the allegations. The fact that the information in documents requested are not kept in a form accessible in the manner Respondent requests and would involve massive amounts of staff time to construct, makes the request unduly burdensome and costly. Providing access to Respondent at the Department offices to the public portion of the files is adequate at this time.

Department's Motion to Compel

As set forth above, Respondent objected to the Department's Interrogatories No. 2 through 9 on the grounds that they were beyond the scope of the investigation conducted by the Department, because the Department has not previously specified the exact basis for its allegations, because the Department's simple reference to the copy of the file provided as containing the basis for the allegations was inadequate, and because the settlement between the Commissioner and Inter-State had settled and resolved some of the issues in this matter. As discussed above, those objections are not well taken and Respondent should be required to answer Interrogatories 2 through 9 as propounded.

Interrogatory No. 1 requests statements made by Respondent or its witnesses and all documents to be used in evidence at the hearing. Respondent objected to the interrogatory as overly broad and confusing. As agreed during the telephone conference of June 30, 1997, the parties are to be negotiating a schedule for completing discovery. Any necessary clarification and timing on this interrogatory should also be negotiated by the parties. Request for Production of Documents No. 1 requested all documents referred to in the Answers to Interrogatories or which would substantiate any of the answers to interrogatories. Such documents should be provided in accordance with the schedule determined by the parties.

Department's Motion for Protective Order

The Department has moved for a Protective Order prohibiting Respondent and its agents from discarding or destroying information or documents related to this proceeding. The concern arises in that Respondent is in a corporate reorganization in which it is being taken over by a holding company. The Department's investigators have received reports that much of Respondent's work force is being laid off and many of its files are being purged and destroyed. Respondent objects to the Order as without merit and based upon inaccurate information. The motion was denied orally at oral argument on June 13, 1997. It was denied because Respondent's counsel have previously given the Department and the Administrative Law Judge assurances that relevant documents would not be destroyed, the reorganization has largely taken place already, and if it comes to appear that documents were destroyed despite such assurances, the Administrative Law Judge will impose appropriate sanctions.

Discovery Regarding Charles Krieg

Charles Krieg is an insurance agent of Respondent. The Department has been conducting a separate investigation regarding Mr. Krieg. Respondent requests an Order from the Administrative Law Judge requiring the Commissioner to use the discovery process in this matter for any questions it wishes to pose to Mr. Krieg. Respondent's argument is apparently that the Department must do so because any questions of Mr. Krieg would be within the scope of the investigation conducted in this matter. Respondent's Memo Re Scope at 18-19.

The Department responds that the Administrative Law Judge has no authority except with respect to hearings which have been commenced under the Administrative Procedure Act. That position is correct. The Administrative Law Judge is without authority to direct any investigation by the Commissioner. For that reason, Respondent's request was denied at oral argument.

S.M.M.