Mercury Insurance 2011 Annual Report Download - page 58

described in the 2010 NNC are not otherwise able to be resolved informally with the California DOI. The
California DOI has recently advised the Company that it is continuing to review this matter and it continues to
question certain past practices. No final determination has been made by the California DOI on how it will
proceed going forward. The Company anticipates that it will be advised by the California DOI in the near future
as to how the California DOI intends to proceed. The Company denies the allegations in the 2010 NNC and
believes that it has done nothing to warrant the 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 this matter has been the
subject of multiple continuations since the original Notice of Non-Compliance was issued in 2004, the Company
believes it has received some favorable evidentiary related rulings from the administrative law judge that may
impact the outcome of this matter. On June 7, 2011, the Company filed a number of motions, including motions
designed to dispose of the 2004 NNC or to substantially pare it down. Briefing on the motions is complete and
the Company has requested oral argument, but no hearing has been set. On January 31, 2012, the administrative
law judge issued a bifurcation order which ordered a separate hearing on the California DOI’s order to show
cause and accusation, concerning the California DOI’s false advertising allegations, to be scheduled after the
Commissioner’s disposition of the proposed decision on the notice of noncompliance, which concern the
California DOI’s allegations that Mercury used unlawful rates.
In the 2004 and 2010 NNC matters, the Company believes that no monetary penalties are warranted and
intends to defend the issues vigorously. The Company has been subject to fines and penalties by the California
DOI in the past due to alleged violations of the California Insurance Code. The largest and most recent of these
was settled in 2008 for $300,000. However, prior settlement amounts are not necessarily indicative of the
potential results in the current Notice of Non-Compliance matters. Based upon its understanding of the facts and
the California Insurance Code, the Company does not expect that the ultimate resolution of the 2004 and 2010
NNC matters will be material to the Company’s financial position. The Company has accrued a liability for the
estimated cost to defend itself in the regulatory matters described above.
The Company is, from time to time, named as a defendant in various lawsuits or regulatory actions
incidental to its insurance business. The majority of lawsuits brought against the Company relate to insurance
claims that arise in the normal course of business and are reserved for through the reserving process. For a
discussion of the Company’s reserving methods, see “Critical Accounting Estimates” and Note 1 of Notes to
Consolidated Financial Statements.
The Company also establishes reserves for non-insurance claims related lawsuits, regulatory actions, and
other contingencies for which the Company is able to estimate its potential exposure and when the Company
believes a loss is probable. For loss contingencies believed to be reasonably possible, the Company also discloses
the nature of the loss contingency and an estimate of the possible loss, range of loss, or a statement that such an
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