Mercury Insurance 2011 Annual Report Download - page 48

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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, interpretation of policy language, 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
is uncertain. The precise nature of the relief that may be sought or granted in any lawsuit is uncertain and may
negatively impact the manner in which the Company conducts its business and results of operations, which could
materially increase the Company’s legal expenses. In addition, potential litigation involving new claim,
coverage, and business practice issues could adversely affect the Company’s business by changing the way
policies are priced, extending coverage beyond its underwriting intent, or increasing the size of claims.
Risks Related to the Company’s Stock
The Company is controlled by small number of shareholders who will be able to exert significant
influence over matters requiring shareholder approval, including change of control transactions.
George Joseph and Gloria Joseph collectively own more than 50% of the Company’s common stock.
Accordingly, George Joseph and Gloria Joseph have the ability to exert significant influence on the actions the
Company may take in the future, including change of control transactions. This concentration of ownership may
conflict with the interests of the Company’s other shareholders and lenders.
Future sales of common stock may affect the market price of the Company’s common stock and the
future exercise of options and warrants will result in dilution to the Company’s shareholders.
The Company may raise capital in the future through the issuance and sale of shares of its common stock.
The Company cannot predict what effect, if any, such future sales will have on the market price of its common
stock. Sales of substantial amounts of its common stock in the public market could adversely affect the market
price of the Company’s outstanding common stock, and may make it more difficult for shareholders to sell
common stock at a time and price that the shareholder deems appropriate. In addition, the Company has issued
options to purchase shares of its common stock. In the event that any options to purchase common stock are
exercised, shareholders will suffer dilution in their investment.
Applicable insurance laws may make it difficult to effect a change of control of the Company or the sale
of any of its insurance subsidiaries.
Before a person can acquire control of a U.S. insurance company or any holding company of a U.S.
insurance company, prior written approval must be obtained from the DOI of the state where the insurer is
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