Mercury Insurance 2015 Annual Report Download - page 94

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17. Commitments and Contingencies
Operating Leases
The Company is obligated under various non-cancellable lease agreements providing for office space, automobiles, and
office equipment that expire at various dates through the year 2021. For leases that contain predetermined escalations of the
minimum rentals, the Company recognizes the related rent expense on a straight-line basis and records the difference between the
recognized rental expense and amounts payable under the leases as deferred rent in other liabilities. This liability amounted to
$3.6 million and $4.4 million at December 31, 2015 and 2014, respectively. Total rent expense under these lease agreements was
$16.0 million, $14.6 million, and $19.3 million for 2015, 2014, and 2013, respectively.
The following table presents future minimum commitments for operating leases as of December 31, 2015:
Year Ending December 31, Operating Leases
(Amounts in thousands)
2016 $ 14,765
2017 11,008
2018 4,684
2019 1,006
2020 463
Thereafter 64
California Earthquake Authority ("CEA")
The CEAis a quasi-governmental organization that was established to provide a market for earthquake coverage to California
homeowners. The Company places all new and renewal earthquake coverage offered with its homeowners policies directly with
the CEA. The Company receives a small fee for placing business with the CEA, which is recorded as other income in the consolidated
statements of operations. Upon the occurrence of a major seismic event, the CEA has the ability to assess participating companies
for losses. These assessments are made after CEA capital has been expended and are based upon each company’s participation
percentage multiplied by the amount of the total assessment. Based upon the most recent information provided by the CEA, the
Company’s maximum total exposure to CEAassessments at April 1, 2015, the most recent date at which information was available,
was approximately $64.3 million. There was no assessment made in 2015.
Regulatory Matters
In April 2010, the California DOI ("CDI") 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 CDI in February
2010. The 2010 NNC included allegations of 35 instances of noncompliance with applicable California insurance law and sought
to require that each of MIC, MCC, and CAIC change its rating and underwriting practices to rectify the alleged noncompliance
and reserved the right to seek monetary penalties. In April 2010, the Company submitted a Statement of Compliance and Notice
of Defense to the CDI, 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 did not
establish to the satisfaction of the CDI that the alleged noncompliance did not exist, and the matters described in the 2010 NNC
were not able to be resolved informally with the CDI. While continuing to dispute the CDI's allegations, the Company implemented
various changes requested by the CDI and engaged in settlement discussions in the interest of avoiding further litigation. On
March 2, 2015, MIC, MCC and CAIC entered into an agreement with the CDI, pursuant to which all allegations in the 2010 NNC
were settled for $1 million, which was subsequently paid, and the case was resolved.
In March 2006, the CDI 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 CDI sought to impose a fine for each policy on which the Company allegedly permitted an agent to charge a broker fee, to
impose a penalty for each policy on which the Company allegedly used a misleading advertisement, and to suspend certificates
of authority for a period of one year. In January 2012, the administrative law judge (the "ALJ") bifurcated the 2004 NNC between
(a) the CDI’s order to show cause (the "OSC"), in which the CDI asserts the false advertising allegations and accusation, and (b)
the CDI’s notice of noncompliance, in which the CDI asserts the unlawful rate allegations. In February 2012, the ALJ submitted
a proposed decision dismissing the NNC, based on conduct by the CDI and the Commissioner in violation of the Company's due
process rights. Specifically, the ALJ found that the CDI's attorneys and the Commissioner engaged in improper ex parte