Progressive 2004 Annual Report Download - page 21

APP.-B-21
11) Litigation
The Company is named as defendant in various lawsuits arising out of its insurance operations. All legal actions relating to claims made
under insurance policies are considered by the Company in establishing its loss and loss adjustment expense reserves.
In addition, the Company is named as defendant in a number of class action or individual lawsuits. Other insurance companies face
many of these same issues. The lawsuits discussed below are in various stages of development. The Company plans to contest these suits
vigorously, but may pursue settlement negotiations in appropriate cases. The outcomes of these cases are uncertain at this time. In accordance
with GAAP, the Company is only permitted to establish loss reserves for lawsuits when it is probable that a loss has been incurred and the
Company can reasonably estimate its potential exposure (referred to as a loss that is both “probable and estimable” in the discussion
below). As to lawsuits that do not satisfy both parts of this GAAP standard, the Company has not established reserves at this time. However,
in the event that any one or more of these cases results in a judgment against or settlement by the Company, the resulting liability could
have a material effect on the Company’s financial condition, cash flows and results of operations.
As required by the GAAP standard, the Company has established loss reserves for lawsuits as to which the Company has determined
that a loss is both probable and estimable. Certain of these cases are mentioned in the discussion below. Based on currently available
information, the Company believes that its reserves for these lawsuits are reasonable and that the amounts reserved did not have a material
effect on the Company’s financial condition or results of operations. However, if any one or more of these cases results in a judgment
against or settlement by the Company for an amount that is significantly greater than the amount so reserved, the resulting liability could
have a material effect on the Company’s financial condition, cash flows and results of operations.
Following is a discussion of the Company’s potentially significant pending cases at December 31, 2004.
There are two putative class action lawsuits challenging the Company’s use of certain automated database vendors to assist in the
adjustment of bodily injury claims. Plaintiffs allege that these databases systematically undervalue the claims. The Company does not
consider a loss from these cases to be probable and estimable, and is unable to estimate a range of loss, if any, at this time.
There are three putative class action lawsuits challenging the Company’s installment fee programs. The Company has successfully
defended similar cases in the past and does not consider a loss to be probable and estimable, and is unable to estimate a range of loss, if
any, at this time.
There are three putative class action lawsuits challenging the Company’s practice of specifying aftermarket (non-original equipment
manufacturer) replacement parts in the repair of insured or claimant vehicles. Plaintiffs in these cases generally allege that aftermarket
parts are inferior to replacement parts manufactured by the vehicle’s original manufacturer and that the use of such parts fails to restore
the damaged vehicle to its “pre-loss” condition, as required by their insurance policies. The Company does not consider a loss from these
cases to be probable and estimable, and is unable to estimate a range of loss, if any, at this time.
There are three putative class action lawsuits pending against the Company in Florida challenging the legality of the Company’s payment
of preferred provider rates on personal injury protection (PIP) claims. The primary issue is whether the Company violated Florida law by paying
PIP medical expense claims at preferred provider rates. The Company does not consider a loss to be probable and estimable, and is unable
to estimate a range of loss, if any, at this time. During 2004, the Company settled an individual bad faith lawsuit in Florida, which alleged
similar issues; the settlement did not have a material effect on the Company’s financial condition, cash flows or results of operations.
There are two putative class action lawsuits challenging the Company’s use of certain automated database vendors to assist in the
evaluation of total loss claims. Plaintiffs allege that these databases systematically undervalue total loss claims to the detriment of insureds.
The Company has been engaged in extensive settlement negotiations to resolve the claims raised in these cases and has established a loss
reserve for this resolution.
There are five class action lawsuits challenging certain aspects of the Company’s use of credit information and notice requirements
under the federal Fair Credit Reporting Act. The Company had entered into a settlement agreement to resolve these cases, had received
preliminary court approval of the settlement and had established a reserve accordingly. On February 24, 2005, the Company was advised
that the court denied final approval of the proposed settlement, and the Company is now assessing the impact of this decision and reviewing
available options, which may include further negotiations with counsel for the plaintiffs or a resumption of the litigation. During 2004, the
Company settled a state-specific case within the reserve amount established in prior years.
The Company has prevailed in four putative class action lawsuits, in various Texas state courts, alleging that the Company is obligated
to reimburse insureds, under their auto policies, for the inherent diminished value of their vehicles after they have been involved in an
accident. Plaintiffs define inherent diminished value as the difference between the market value of the insured automobile before an accident
and the market value after proper repair. The Supreme Court of Texas has ruled that diminished value recovery is not available under the
Texas automobile policy. In February 2002, the Company reached an agreement to settle its Georgia diminution of value case for $19.8
million, plus administrative costs. The claims process was completed in early 2003. The Company believes that Georgia law on diminution
of value is an anomaly and has successfully defended several of these cases in other jurisdictions.
In November 2002, the Company reached an agreement to settle for $10 million its lawsuit relating to the classification of the Company’s
California claims employees as “exempt” workers for purposes of state wage and hour laws. The claims process for the settlement of the
California case was completed in early 2003. That class action lawsuit was based on California-specific law.