Mercury Insurance 2012 Annual Report Download - page 99

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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 directly with
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, 2012, the most recent date at which information was available,
was approximately $52.2 million. There was no assessment made in 2012.
Regulatory Matters
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. The Company has accrued a liability for the estimated cost to defend itself in the notice of non-compliance
matters.
Litigation
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 Note 1.