Attorneys Ins. Mut. Of Ala. Inc v. Ala. Dep't Of Ins., 2081139

Attorneys Insurance Mutual of Alabama, Inc.

v.Alabama Department of Insurance

NO. 2081139

NO. 8-1437

Alabama Court Of Civil Appeals

FILED: August 13, 2010

Appeal from Montgomery Circuit Court

PER CURIAM.

This is an appeal of a judgment affirming an administrative decision of the commissioner ("the commissioner") of the Alabama Department of Insurance ("the department").

The record indicates that Attorneys Insurance Mutual of Alabama, Inc. ("AIM"), was created in 1988 and began operating in 1989 as a provider of legal-malpractice insurance for attorneys licensed and practicing in Alabama. The department is required to conduct an examination of an insurer such as AIM every five years; each examination concerns a five-year period of operations of the insurance company being reviewed. See § 27-2-21, Ala. Code 1975. In 2007, the department released its report of the examination (hereinafter "the examination report") for AIM for the period January 1, 2001, through December 31, 2005. AIM filed an objection to several aspects of that report. The parties could not resolve their differences regarding whether to leave in the examination report some of the conclusions reached by the department to which AIM objected. Therefore, AIM requested a hearing before the commissioner. See § 27-2-28, Ala. Code 1975.

The commissioner conducted a hearing at which he received ore tenus evidence and a number of documentary exhibits. In his August 28, 2008, decision, the commissioner found in favor of the department on several issues in dispute, and he resolved some issues in favor of AIM. In pertinent part, thecommissioner affirmed the department's determinations that AIM had violated § 27-27-26, Ala. Code 1975, through the arrangement by which AIM compensated an officer and director of the company who provided legal and other services to AIM; that AIM's loss reserves did not comply with applicable accounting standards; and that § 27-12-15, Ala. Code 1975, prohibited AIM's practice of allowing some of its policyholders to pay their annual insurance premiums in installments without first having filed certain documentation with the department concerning those installment payments.

AIM timely filed in the Montgomery Circuit Court ("the trial court") a petition for judicial review of the commissioner's administrative decision.¹ See § 27-2-32, Ala. Code 1975. On August 3, 2009, the trial court entered a judgment stating only that it affirmed the administrative decision, and it dismissed AIM's appeal. From that judgment, AIM timely appealed to this court.

This opinion first sets forth the facts underlying each of the issues in dispute and frames the issues to be reviewed.

This court's analysis of each of those issues follows the recitation of all of the facts and the description of the underlying disputes.

Before the commissioner, the parties disagreed regarding whether AIM's compensation arrangement for one of its officers and directors is proper. The facts relevant to that issue are as follows. Charles Howard Moses III serves on the board of directors of, and is the secretary/treasurer for, AIM. Moses has served in those capacities since 1989, when AIM began its operations. We note that in his testimony, Moses often referred to an affidavit he had executed pertaining to the issue of his compensation arrangement with AIM; AIM submitted that affidavit to the commissioner as an exhibit, and it is quoted later in this opinion. In essence, Moses's testimony was consistent with the statements set forth in the affidavit.

Moses testified that he has served as a director for AIM and that he has received the usual compensation paid to directors by a corporation. The fees paid to Moses for his services as a director are paid to him directly and are not included as part of the payment arrangement in dispute in this matter.

Moses also testified that since the inception of AIM he has provided a variety of services, including legal advice, to AIM. Moses explained that as AIM's secretary/treasurer he maintains the minutes of the company and its committees, and he maintains AIM's corporate records. Moses also stated that he reviews financial records, such as accounting and investing records, and various aspects of AIM's investment policy and practices.

Moses admitted that he signs some checks for AIM; Moses explained that he signs all checks of more than $50,000 and that he signs checks when Henry Henzel, AIM's president, is not available to do so. Moses also stated that he reviews the reconciliation of the monthly bank statement. In addition to the services already discussed, Moses provides some legal services to AIM.

Moses is not an employee of AIM. Rather, AIM pays Moses & Moses, P.C. ("Moses & Moses"), the law firm in which Moses is a partner, a retainer fee for the services Moses provides AIM. Moses stated that Moses & Moses is paid a legal-services retainer, although some of the services he provides are nonlegal services; Moses stated that many of the services heprovides in performing his duties as secretary/treasurer are ordinary business functions and are not confined to legal services.² Moses testified that he had never attempted to allocate the services he provided to AIM between purely legal services and business services. Moses explained the retainerfee agreement between AIM and Moses & Moses by stating that "[i]t's the way in which AIM has chosen to and the Board has chosen to compensate me to do not only the legal services but the treasurer activities. Secretary, certainly, is a legal service."

Moses testified that he believes the current compensation arrangement complies with applicable law and that it is "the best and most economic and competitive way" for AIM to pay for the services he provides. Henzel, AIM's president, testified that he believed AIM received "more than [its] money's worth" from the services Moses provided AIM.

Moses testified that each year he presents to AIM's personnel committee a proposal for the amount he believes Moses & Moses should be paid for the services he provides AIM.

According to Moses, the personnel committee then makes a recommendation regarding the payment for Moses's services to AIM's board of directors, of which Moses is a member. The evidence demonstrated that the annual retainer fee approved by AIM's board of directors for Moses's services is divided into equal monthly installments that AIM pays to Moses & Moses. Currently, Moses & Moses receives an $80,000 annual retainer from AIM. Moses pointed out that he has been compensated pursuant to the retainer-fee arrangement for a number of years and that the department had not questioned that fee arrangement in its earlier examinations of AIM.

Before the commissioner, Moses testified that the retainer AIM pays to Moses & Moses is not related to any specific transaction or asset of AIM. In essence, Moses's testimony at the ore tenus hearing was consistent with the assertions in his affidavit submitted to the commissioner in which Moses stated, in pertinent part:

"The duties for which the retainer is paid, which have not materially changed throughout the entire existence of the retainer relationship, include:

" Duties of the Secretary are the usual duties of a corporate secretary, e.g. attendance at meetings of the Board of Directors and committees and recording ofminutes of the meetings and maintenance of the corporate records of [AIM].

" Duties of the Treasurer include preparation of reports and tax returns to be filed with appropriate governmental agencies, preparing summary reports to the Board, and assisting the investment custodian and investment advisors in the management of [AIM's] investments. The duties of the Treasurer do not include the supervision of the choice of any particular investment made by [AIM].

" [Moses] also provides legal and other services for [AIM] pursuant to the Firm's retainer relationship which include advising on corporate law matters affecting the operations of [AIM]; assisting the Board of Directors, the President and Vice President-Underwriting in matters relating to the operations of [AIM]; and advising the Claims Committee or claims counsel on specific issues related to the legal experience and qualifications of [Moses]. In addition, certain tax planning and tax reporting matters are handled by [Moses] for [AIM].

"There is no aspect of the retainer paid to [Moses & Moses] that is related to any transaction involving the assets or reinsurance of [AIM]. All investment activity of [AIM] is within the framework of [AIM's] Investment Policy. The Board of Directors approves the Investment Policy of the Company not less frequently than annually based on the presentation and recommended changes by [AIM's] independent investment advisors and Investment/Audit Committee of [AIM]. Neither [Moses] nor [Moses & Moses] is, or has been, compensated for any investment transaction in which [AIM] is a party nor for the performance of [AIM's] investment portfolio.

No broker, dealer, investment manager or investment adviser has ever provided any form of compensation to [Moses] or [Moses & Moses] at any time, directly or indirectly, related to any transaction involving the assets of [AIM], nor has [AIM] adjusted the retainer compensation in relation to any investment transactions in which [AIM] has engaged or planned to engage.

"No part of compensation to [Moses] or [Moses & Moses] is related to the placement of reinsurance, whether from the reinsurers or their intermediaries. [Moses] reviews reinsurance contracts and advises the President of [AIM] in the negotiation of these contracts, but has never had any relationship with any reinsurer, directly or indirectly, nor with any intermediary for a reinsurer."

Another issue in dispute pertains to AIM's maintenance of loss reserves. Loss reserves are an estimate of the liquid funds necessary to pay outstanding claims against an insurer's policyholders. The term "loss reserve" has been defined as "[t]...