Mercury Insurance 2013 Annual Report Download - page 47

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data, and an 8.26% rate increase was approved by the California Insurance Commissioner. The rate increase went into effect in
January 2014. In addition, the Company is challenging some of the issues in Superior Court that were raised by the ALJ in the
rate hearing.
In January 2013, the California DOI approved an auto body repair regulation intended to strengthen consumer protection.
This regulation requires insurers to settle automobile insurance claims using repair standards described by the regulation and not
by the insurers' own standards. The new ruling became effective in March 2013. While the impact of the new ruling was minimal
during 2013, it may increase the cost of parts for auto repairs in the future.
In April 2010, the California DOI issued a Notice of Non-Compliance (“2010 NNC”) to MIC, MCC, and 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 on which the Company allegedly permitted an agent to charge a broker
fee and a penalty for each policy 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 ALJ 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 ALJ submitted
a proposed decision dismissing the California DOI’s 2004 NNC. In March 2012, the California Insurance Commissioner rejected
the ALJ’s proposed decision. The Company challenged the rejection in Superior Court in April 2012. Following a hearing, the
Superior Court sustained the California Insurance Commissioner’s demurrer without leave to amend because it found the Company
must first exhaust its administrative remedies. In January 2013, the Superior Court’s decision was subsequently affirmed on appeal.
In January 2013, the ALJ heard various pending motions that had been filed by the Company in June 2011. The ALJ granted certain
portions of the California DOI's motion for collateral estoppel to prevent the Company from litigating certain findings of fact
reached in a prior litigation action and denied the Company's motion for governmental estoppel and laches, without prejudice, on
the ground that a resolution of the motion requires specific factual findings in the context of the evidentiary hearing. The ALJ held
an evidentiary hearing on the noncompliance portion of the 2004 NNC during April 2013. A mediation was held in September
2013, but the parties were unable to reach a settlement of the matter. Post-hearing briefs have been filed by the Company, the
California DOI, and a consumer group. Until the evidentiary record is closed, there is no set timetable for a decision by the ALJ
or, thereafter, a decision by the California Insurance Commissioner.
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.
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 Policies and 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
when the Company believes a loss is probable and is able to estimate its potential exposure. 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