Mercury Insurance 2007 Annual Report Download - page 82

80 MERCURYNOW 2007
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LITIGATION
The Company is, from time to time, named as a defendant in various lawsuits relating to its insurance business. In most of these actions, plaintiffs
assert claims for punitive damages, which are not insurable under judicial decisions. The Company has established reserves for lawsuits in cases
where the Company is able to estimate its potential exposure and it is probable that the court will rule against the Company. The Company
vigorously defends actions against it, unless a reasonable settlement appears appropriate. An unfavorable ruling against the Company in the actions
currently pending may have a material impact on the Company’s results of operations in the period of such ruling, however, it is not expected to
be material to the Company’s financial condition.
Sam Donabedian, individually and on behalf of those similarly situated v. Mercury Insurance Company, et al., was originally filed on April 20, 2001 in the
Los Angeles Superior Court, asserting, among other things, a claim that the Company’s calculation of persistency discounts to determine premiums
is an unfair business practice, a violation of the California Consumer Legal Remedies Act (“CLRA”) and a breach of the covenant of good faith
and fair dealing. The Company originally prevailed on a Demurrer to the Complaint and the case was dismissed; however, the California Court
of Appeal reversed the trial court’s ruling, deciding that the California Insurance Commissioner does not have the exclusive right to review the
calculation of insurance rates/premiums. After filing two additional pleadings, on June 28, 2005, the Plaintiff filed a Fourth Amended Complaint
asserting claims for violation of California Business & Professions Code Section 17200 and breach of the covenant of good faith and fair dealing
(the CLRA claim previously had been dismissed with prejudice). Plaintiff again sought injunctive relief, unspecified restitution and monetary
damages as well as punitive damages and attorneys’ fees and costs. Without leave of court, the Plaintiff also attempted to state claims for breach of
contract and fraud. The Company filed a Demurrer and Motion to Strike certain portions of the Plaintiff’s Fourth Amended Complaint. Following
a hearing on September 19, 2005, the Court took the matter under submission. While the motions were under submission, counsel for the Plaintiff
asked the Company to engage in settlement discussions. The Court agreed to stay the matter and counsel for the Plaintiff and the Company met
on several occasions to seek resolution, but none was reached.
Additionally, over the Company’s objection, on May 9, 2005, the trial court permitted The Foundation for Taxpayer and Consumer Rights
(“FTCR”) to file a Complaint in Intervention to allege that the Company’s calculation of persistency discounts constitutes a violation of insurance
Code Section 1861.02(a) and (c). Following a ruling by the Court of Appeal in another case which found that there is no private right of action
to allege violations of Section 1861.02, the Company brought a motion for judgment on the pleadings to have FTCR’s Complaint in Intervention
dismissed. That motion was heard on April 28, 2006. Subsequent to the hearing, FTCR filed an amended complaint in intervention, and the
Company again filed a motion for judgment on the pleadings, which the Court denied at a hearing on July 31, 2006. In view of the then on-going
settlement discussions with the Plaintiff, the Company did not seek further appellate review of the Court’s ruling.
During the fall of 2005, counsel for the Plaintiff and the Company met on several occasions in an effort to resolve the case. FTCR was not
invited to participate in these discussions. When Plaintiff and the Company were not able to reach a resolution, the Court ordered the parties to a
settlement conference before another judge. On August 1, 2006, following three settlement conferences, the Company and the Plaintiff reached a
preliminary settlement which was subject to completion of the class approval process and was also subject to objections and review by the Court.
Prior to the hearing scheduled for October 30, 2006, the FTCR filed objections to the proposed settlement. Also, shortly before the hearing, the
California DOI filed a letter with the Court contending that the terms of the settlement, which provided for a coupon to class members to be used
toward the purchase of “new,” not renewal business, constituted a “discount” of insurance rates and thus would be subject to the California DOI’s
approval. Following several delays and further briefing by the parties, at a hearing on February 5, 2007, the Court declined to give preliminary
approval to the proposed settlement. Accordingly, upon the Company’s request, the tentative ruling on the Company’s demurrer and motion to
strike was unsealed. The Court sustained the Company’s demurrer to all but the Section 17200 claim, as well as a claim for alleged violation of
Insurance Code Section 1861.02 which the parties subsequently stipulated to dismiss. The Court also granted the Company’s request to strike
the punitive damage claim. On February 27, 2007, the Court determined, at the Company’s request, that the Court would initially evaluate the
Company’s defenses that its conduct was protected by the administrative estoppel and filed rate plan doctrines and thus the Company has no
liability in the case and established a schedule for discovery and briefing on these issues. Thereafter, the Company and Plaintiff continued settlement
discussions and ultimately were able to reach an agreement which has preliminarily been approved by the Court. The settlement provides for the
Company to issue coupons to class members (who do not opt out of the class) that can be used towards new or renewal business in a minimum
aggregate amount of $5 million, and if coupons up to that amount are not redeemed, the difference will go to charities to be designated by the
Court. The Company submitted the filing to the California DOI for approval and the terms of the settlement were approved by the California DOI
in September 2007. Accordingly, the Company has mailed notice of the settlement to all class members who will then have a period of time to
object or opt out of the settlement if they choose not to participate. A settlement was approved by the Court on December 14, 2007. The Court also
considered FTCR’s request for attorney’s fees and took the matter under submission. Prior to the Court’s ruling on the matter, the Plaintiff agreed
to reduce its $1,575,000 in agreed upon fees by $250,000, payable to FTCR, and the Company agreed to give FTCR an additional $250,000 for a
total payment of attorneys’ fees by the Company to Plaintiffs’ counsel of $1,325,000 and to counsel for FTCR of $500,000 with any additional fees
claimed by FTCR to come from any monies that remain available in the guaranteed $5 million that the Company has committed in the settlement
after redemption of coupons issued to class members. The agreed upon counsel fees have been accrued as of December 31, 2007. The judgment
will be final on March 25, 2008 unless an appeal is taken.