Mercury Insurance 2010 Annual Report Download - page 47

insurance rates. The agreement reached with the DOI includes a 4.96% rate reduction in MIC and a 4.44% rate
reduction in MCC and CAIC. In addition, the rate filing improves the Company’s risk segmentation and
introduces new discounts and road side assistance coverage. The rate filing became effective on December 15,
2010, and the Company expects that the new rates will make the Company more competitive in attracting new
customers. The change in the actual average premiums collected per policy will differ from the change in the
approved rates as a result of product enhancements, which command a higher rate, and any changes made to
individual insurance policies relating to coverage amounts, vehicles insured, miles driven, or other rating factors
that determine the rates charged for an insurance policy.
On April 9, 2010, the California DOI issued a Notice of Non-Compliance (“2010 NNC”) to MIC, MCC, and
CAIC based on a Report of Examination of the Rating and Underwriting Practices of these companies issued by
the California DOI on February 18, 2010. The 2010 NNC includes allegations of 35 instances of noncompliance
with applicable California insurance law and seeks to require that each of MIC, MCC, and CAIC change its
rating and underwriting practices to rectify the alleged noncompliance and may also seek monetary penalties. On
April 30, 2010, the Company submitted a Statement of Compliance and Notice of Defense to the 2010 NNC, in
which it denied the allegations contained in the 2010 NNC and provided specific defenses to each allegation. The
Company also requested a hearing in the event that the Statement of Compliance and Notice of Defense does not
establish to the satisfaction of the California DOI that the alleged noncompliance does not exist, and the matters
described in the 2010 NNC are not otherwise able to be resolved informally with the California DOI. The
Company denies the allegations in the 2010 NNC and believes it has done nothing to warrant the monetary
penalties cited in the 2010 NNC.
In March 2006, the California DOI issued an Amended Notice of Non-Compliance to a Notice of
Non-Compliance originally issued in February 2004 (as amended, “2004 NNC”) alleging that the Company
charged rates in violation of the California Insurance Code, willfully permitted its agents to charge broker fees in
violation of California law, and willfully misrepresented the actual price insurance consumers could expect to
pay for insurance by the amount of a fee charged by the consumer’s insurance broker. The California DOI seeks
to impose a fine for each policy in which the Company allegedly permitted an agent to charge a broker fee, which
the California DOI contends is the use of an unapproved rate, rating plan or rating system. Further, the California
DOI seeks to impose a penalty for each and every date on which the Company allegedly used a misleading
advertisement alleged in the 2004 NNC. Finally, based upon the conduct alleged, the California DOI also
contends that the Company acted fraudulently in violation of Section 704(a) of the California Insurance Code,
which permits the California Commissioner of Insurance to suspend certificates of authority for a period of one
year. The Company filed a Notice of Defense in response to the 2004 NNC. The Company does not believe that
it has done anything to warrant a monetary penalty from the California DOI. The San Francisco Superior Court,
in Robert Krumme, On Behalf Of The General Public v. Mercury Insurance Company, Mercury Casualty
Company, and California Automobile Insurance Company, denied plaintiff’s requests for restitution or any other
form of retrospective monetary relief based on the same facts and legal theory. While a hearing before the
administrative law judge had been set to start on September 14, 2009, the hearing has been vacated. The
evidentiary phase of the hearing has been rescheduled to begin May 9, 2011. On February 15, 2011, there will be
a procedural hearing addressing evidentiary issues. The outcome of the procedural hearing on February 15 may
impact the commencement of the hearing on May 9, 2011 and could have an impact on the outcome to the extent
limitations on certain evidence is ordered by the administrative law judge. This matter has been the subject of
five continuations since the original Notice of Non-Compliance was issued.
In the 2004 and 2010 NNC matters, the Company believes that no monetary penalties are warranted and
intends to defend the issues vigorously. The Company has been subject to fines and penalties by the California
DOI in the past due to alleged violations of the California Insurance Code. The largest and most recent of these
was settled in 2008 for $300,000. However, prior settlement amounts are not necessarily indicative of the
potential results in the current Notice of Non-Compliance matters. Based upon its understanding of the facts and
the California Insurance Code, the Company does not expect that the ultimate resolution of the 2004 and 2010
NNC matters will be material to the Company’s financial position. The Company has accrued a liability for the
estimated cost to defend itself in the regulatory matters described above.
37