Mercury Insurance 2015 Annual Report Download - page 44

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of authority for a period of one year. In January 2012, the administrative law judge (the "ALJ") bifurcated the 2004 NNC between
(a) the CDI’s order to show cause (the "OSC"), in which the CDI asserts the false advertising allegations and accusation, and (b)
the CDI’s notice of noncompliance, in which the CDI asserts the unlawful rate allegations. In February 2012, the ALJ submitted
a proposed decision dismissing the NNC, based on conduct by the CDI and the Commissioner in violation of the Company's due
process rights. Specifically, the ALJ found that the CDI's attorneys and the Commissioner engaged in improper ex parte
communication, and commenced a rule making in order to supersede unfavorable evidentiary rulings by theALJ. The Commissioner
rejected the ALJ's proposed decision. The Company challenged the rejection in Los Angeles Superior Court in April 2012, but
the challenge was unsuccessful. The Court did not rule on the merits of the ALJ's due process concerns, but merely held that the
Company was required to exhaust its administrative remedies before seeking relief in the Superior Court. The case was referred
back to the ALJ, and the due process issues raised by the ALJ's dismissal were preserved for later appeal. Following an evidentiary
hearing in April 2013, post-hearing briefs and an unsuccessful mediation, the ALJ closed the evidentiary record on April 30, 2014.
Although a proposed decision was to be submitted to the Commissioner on or before June 30, 2014, after which the Commissioner
would have 100 days to accept, reject or modify the proposed decision, or required further evidence, the proposed decision was
submitted on December 8, 2014. On January 7, 2015, the Commissioner adopted the ALJ's proposed decision, which became the
Commissioner's adopted Order. The Company received notice of this Order on January 10, 2015. The decision and Order found
that from the period July 1, 1996 through 2006, the Company's "brokers" were actually operating as "de facto agents" and that the
charging of "broker fees" by these producers constituted the charging of "premium" in excess of the Company’s approved rates.
The Order assessed a civil penalty in the amount of $27.6 million against the Company. The Company denies the allegations and/
or findings in the Order, and believes that no monetary penalties are warranted. On February 9, 2015, the Company filed a Writ
of Administrative Mandamus and Complaint for Declaratory Relief (the "Writ") in the Orange County Superior Court seeking,
among other things, to require the Commissioner to vacate the Order, to stay the Order while the Superior Court action is pending,
and to judicially declare as invalid the Commissioner’s interpretation of certain provisions of the California Insurance Code.
Subsequent to the filing of the Writ, a consumer group petitioned and was granted the right to intervene in the Superior Court
action. The court did not order a stay, and the $27.6 million assessed penalty was accrued in 2014 and paid in March 2015. The
Company filed an amended Writ on September 11, 2015, adding an explicit request for a refund of the penalty, with interest. The
court initially scheduled the matter for hearing on March 14, 2016, with the opening brief due October 19, 2015. The Company
filed its opening brief, but the Commissioner then requested an extension of time to file an opposing brief and for the hearing on
the Writ. The extension was granted, and the hearing is now scheduled for June 13, 2016. The Company intends to vigorously
defend itself against the allegations, and seeks reversal of the $27.6 million assessed fine, unless a reasonable settlement can be
reached.
The Company has also accrued a liability for the estimated cost to continue to defend itself in the false advertising OSC.
Based upon its understanding of the facts and the California Insurance Code, the Company does not expect that the ultimate
resolution of the false advertising OSC will be material to the its financial position.
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" below and Note 1. Summary of Significant Accounting Policies, of the Notes to Consolidated
Financial Statements in "Item 8. Financial Statements and Supplementary Data."
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 material 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 estimate cannot be made. While actual losses may differ from the amounts recorded and the
ultimate outcome of the Company’s pending actions is generally not yet determinable, the Company does not believe that the
ultimate resolution of currently pending legal or regulatory proceedings, either individually or in the aggregate, will have a material
adverse effect on its financial condition, results of operations, or cash flows.
In all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate. For a discussion of
legal matters, see Note 17. Commitments and Contingencies—Litigation, of the Notes to Consolidated Financial Statements in
"Item 8. Financial Statements and Supplementary Data."