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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
California Earthquake Authority (“CEA”)
The CEA is 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 through 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 CEA assessments at April 1, 2010, the most recent date at which
information was available, was approximately $55.6 million. There was no assessment made in 2010.
Regulatory Matters
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 such 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. 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.
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