Mercury Insurance 2012 Annual Report Download - page 53

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line of business, and plans to file for a rate increase in MIC's private passenger automobile line of business. The Company must
obtain approval from the California DOI before implementing these new rates.
In May 2009, the Company filed for a 3.9% rate increase for its California homeowners line of business. In May 2011, the
matter was referred to an administrative law judge for review. After extensive evidentiary hearings, the administrative law judge
delivered a proposed decision on the matter to the California Insurance Commissioner in September 2012 that recommended a
rate reduction of approximately 5.5%. On October 29, 2012, the Company received notice from the California Insurance
Commissioner rejecting the administrative law judge's proposed decision and referred the matter back to the administrative law
judge to gather more evidence. However, the California Insurance Commissioner recently issued a ruling to disregard his order
to gather more evidence. The Company expects a final ruling from the California Insurance Commissioner on this matter in the
near future. The Company does not agree with the proposed rate decrease and believes that recent homeowners loss trends support
an increase. Consequently, the Company recently filed for a rate increase of 6.9%.
In January 2013, the California DOI approved auto body repair regulation to strengthen consumer protection. This regulation
builds on existing protection by requiring insurers to settle automobile insurance claims using repair standards described by the
regulation and not by the insurers' own standards. The new ruling will become effective in March 2013. The full extent of the
impact is currently unknown.
In April 2010, the California DOI issued a Notice of Non-Compliance (“2010 NNC”) to Mercury Insurance Company
(“MIC”), Mercury Casualty Company (“MCC”), and California Automobile Insurance Company (“CAIC”) based on a Report of
Examination of the Rating and Underwriting Practices of these companies issued by the California DOI in February 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. In April 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 allegation. 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. However, no assurance can be given that efforts to resolve
the 2010 NNC informally will be successful.
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 and a penalty for each on which the Company allegedly used a misleading advertisement and to suspend certificates of authority
for a period of one year. In January 2012, the administrative law judge bifurcated the 2004 NNC between (a) the California DOI’s
order to show cause, in which the California DOI asserts the false advertising allegations and accusation, and (b) the California
DOI’s notice of noncompliance, in which the California DOI asserts the unlawful rate allegations. In February 2012, the
administrative law judge submitted a proposed decision dismissing the California DOI’s 2004 NNC. In March 2012, the California
Insurance Commissioner rejected the administrative law judge’s proposed decision. The Company challenged the rejection in Los
Angeles Superior Court in April 2012, and the California Insurance Commissioner filed a demurrer to the Company's petition.
Following a hearing, the trial court sustained the California Insurance Commissioner’s demurrer without leave to amend because
it found the Company must first exhaust its administrative remedies. The Company has appealed the trial court’s decision and on
January 3, 2013, filed a petition to stay the administrative proceeding pending a determination of its appeal. The Court of Appeal
did not stay the adminstrative proceeding but has allowed the appeal to continue. The Company has filed its opening appellate
brief, and the court granted the Company's request for an expedited appeal. On January 15, 2013, the administrative law judge
heard various pending motions that had originally been filed by the Company in June 2011. The administrative law judge has not
yet ruled on the motions.
The Company denies the allegations in the 2004 and 2010 NNC matters, and believes that no monetary penalties are
warranted, and the Company intends to defend itself against the allegations 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, results of operations, or cash flow. The Company has accrued a liability for the estimated cost to defend itself
in the notice of non-compliance matters.