Mercury Insurance 2010 Annual Report Download - page 37

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In addition, from time to time, the Company may support or oppose legislation or other amendments to
insurance regulations in California or other states in which it operates. Consequently, the Company may receive
negative publicity related to its support or opposition of legislative or regulatory changes that may have a
material adverse effect on the Company’s financial condition, results of operations, and liquidity.
Regulation may become more extensive in the future, which may adversely affect the Company’s
business, financial condition, and results of operations.
No assurance can be given that states will not make existing insurance-related laws and regulations more
restrictive in the future or enact new restrictive laws. New or more restrictive regulation in any state in which the
Company conducts business could make it more expensive for it to continue to conduct business in these states,
restrict the premiums the Company is able to charge or otherwise change the way the Company does business. In
such events, the Company may seek to reduce its writings in or to withdraw entirely from these states. In
addition, from time to time, the United States Congress and certain federal agencies investigate the current
condition of the insurance industry to determine whether federal regulation is necessary. The Company cannot
predict whether and to what extent new laws and regulations that would affect its business will be adopted, the
timing of any such adoption and what effects, if any, they may have on the Company’s business, financial
condition, and results of operations.
Assessments and other surcharges for guaranty funds, second-injury funds, catastrophe funds, and other
mandatory pooling arrangements may reduce the Company’s profitability.
Virtually all states require insurers licensed to do business in their state to bear a portion of the loss suffered
by some insured parties as the result of impaired or insolvent insurance companies. Many states also have laws
that established second-injury funds to provide compensation to injured employees for aggravation of a prior
condition or injury which are funded by either assessments based on paid losses or premium surcharge
mechanisms. In addition, as a condition to the ability to conduct business in various states, the insurance
subsidiaries must participate in mandatory property and casualty shared market mechanisms or pooling
arrangements, which provide various types of insurance coverage to individuals or other entities that otherwise
are unable to purchase that coverage from private insurers. The effect of these assessments and mandatory
shared-market mechanisms or changes in them could reduce the Company’s profitability in any given period or
limit its ability to grow its business.
The insurance industry faces risks related to litigation, which, if resolved unfavorably, could result in
substantial penalties and/or monetary damages, including punitive damages. In addition, insurance
companies incur material expenses in the defense of litigation and their results of operations or financial
condition could be adversely affected if they fail to accurately project litigation expenses.
Insurance companies are subject to a variety of legal actions including employee benefit claims, wage and
hour claims, breach of contract actions, tort claims, and fraud and misrepresentation claims. In addition,
insurance companies incur and likely will continue to incur potential liability for claims related to the insurance
industry in general and the Company’s business in particular, such as claims by policyholders alleging failure to
pay for, termination or non-renewal of coverage, sales practices, claims related to reinsurance matters, and other
matters. Such actions can also include allegations of fraud, misrepresentation, and unfair or improper business
practices and can include claims for punitive damages.
Court decisions and legislative activity may increase exposures for any of the types of claims insurance
companies face. There is a risk that insurance companies could incur substantial legal fees and expenses,
including discovery expenses, in any of the actions companies defend in excess of amounts budgeted for defense.
The Company and its insurance subsidiaries are named as defendants in a number of lawsuits. These
lawsuits are described more fully at “Overview—B. Regulatory and Legal Matters” in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and Note 17 of Notes to
Consolidated Financial Statements. Litigation, by its very nature, is unpredictable and the outcome of these cases
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