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Florida Orders Mercury General Units To Return More Than $2 Million To Policyholders

TALLAHASSEE, FL -- Two Mercury General Corp.
subsidiaries have been ordered to pay more than $2 million in refunds to
policyholders for engaging in improper claims settlements and charging rates
not approved by the Florida Office of Insurance Regulation, the OIR said.

The consent order from the OIR came after a lengthy
market-conduct examination of homeowners insurer American Mercury Insurance Co.
and private-passenger automobile insurer Mercury Insurance Company of
Florida.  According to the order,
the examination, which began last July, found 13 separate statutory violations
and three violations of the Florida Administrative Code, including:

-- Refusal to insure or continue to insure based solely on
failure to place collateral business;

-- Failure to maintain complaint-handling procedures;

-- Use of unfiled and unapproved forms;

-- Use of unfiled and unapproved rates;

-- Failure to file an annual rate filing or certification; and

-- Failure to maintain and adhere to established written
procedures for the use of credit reports and scores, among others.

"This is the first time we ever had anything like this occur
in 45 years of operation," said George Joseph, Mercury General's chairman
and chief executive officer. Joseph said Mercury General (NYSE:MCY) hopes to
put the whole event behind it.

 

The OIR said the use of unfiled forms and rates to improperly
deny claims was "the most egregious violation."

"Charging unapproved rates and improperly denying claims
will not be tolerated," Insurance Commissioner Kevin McCarty said in a
statement. "Our laws exist to protect consumers' rights, and will not be
circumvented by these companies or any others in the state of Florida."

Joseph said the companies believed they had filed the proper
forms and rates. He also noted that many of the problems arose from
underwriting practices that weren't as stringent as Mercury General uses in
California.  Joseph said policyholders
provided the wrong information, which was discovered only when a claim was
filed. In Florida, the company was denying claims based on these misrepresentations and then canceling the policies. However, it also was keeping the premiums paid to that point.

 

He said the Mercury General's model in California, in similar
situations, would result in the policy being rescinded and the premium paid to
that point being returned to the policyholder. Also, Joseph said the California
"agents ask questions very carefully."

 

In addition to the refunds, the companies have agreed to pay $1
million to the OIR for administrative fines and reimbursement of examination
expenses.

The OIR said the companies had cooperated with state regulators
and had initiated refunds to policyholders even before regulators left the
company's home offices, beginning in December 2005.

The examination was held because of concerns the Florida
Department of Financial Services had stemming from a "steady increase in
complaints" from Florida policyholders of Mercury, according to the OIR.
Many of the complaints were about American Mercury's failure to cover damage to
screened pool enclosures during the 2004 hurricane season. Joseph said policies
in Florida had an exclusion for screens, and thus the claims were denied.

But when the OIR said the frames and other structural parts of
the enclosures weren't excluded, "we said 'OK,' reopened those claims and
paid them," Joseph said.

The company voluntarily ceased writing new homeowners policies in
Florida, effective Dec. 22, 2005, and isn't writing new business until new
homeowners forms and rates are approved by the OIR.

"Whether we will begin to write homeowners again is
questionable," Joseph said. He blamed the higher cost and lack of
availability of reinsurance in the hurricane-prone state as a reason for the
possibility.

"If we could negotiate the proper reinsurance, we'd
certainly reconsider it," Joseph said.

Both companies have 60 days from the issuance of the consent
order to complete a review of all property and casualty personal and commercial
insurance forms and rates in use and make sure that only appropriate forms and
rates are being used. If the right forms and rates aren't being used, the
companies will have to make the appropriate filings and then have 90 days,
following approval, to implement the changes.

American Mercury is the 36th-largest homeowners insurer in
Florida, with 0.35% of the market in 2004, according to A.M. Best Co.
state/line product information based on direct premiums written. Meanwhile,
Mercury Insurance of Florida is the 12th-largest auto insurer in the state.

Mercury Insurance Company of Florida currently has a Best's
Financial Strength Rating of A+ (Superior). American Mercury currently has a
rating of A- (Excellent).

Contact the author Rick Cornejo, associate editor, BestWeek at:
rick.cornejo@ambest.com