LARRY N. CAMPBELL, CIE

JAMES T. AXMAN, AIE

Independent Market Conduct Examiners

Working in Coordination with

Colorado Division of Insurance

1560 Broadway, Suite 850

Denver, Colorado 80202

(303) 894-7499

I. COMPANY PROFILE

II. PURPOSE AND SCOPE OF EXAMINATION

III. EXAMINATION REPORT SUMMARY

IV. PERTINENT FACTUAL FINDINGS

A. Underwriting

B. Claims Practices

V. SUMMARY OF RECOMMENDATIONS

VI. EXAMINATION REPORT SUBMISSION

May 14, 1997

The Honorable Jack Ehnes

Commissioner of Insurance

State of Colorado

1560 Broadway Suite 850

Denver, Colorado 80202

Commissioner:

In accordance with Sections 10-1-203 and 10-3-1106, C.R.S., an examination of selected underwriting and claims practices of the Private Passenger Automobile Insurance Business of Farmers Insurance Exchange has been conducted. The Company’s records were examined at its Regional office located at 3500 North Nevada Ave., Colorado Springs, Colorado, 80907.

The examination covered the period from January 1, 1995 to December 31, 1995.

A report of the examination is herein respectfully submitted.

COMPANY PROFILE

Farmers Insurance Exchange, hereinafter referred to as "the Company", was organized on March 28, 1928 in Los Angeles, California and commenced business in California on April 6, 1928. The Company is currently licensed in Alabama, Arizona, Arkansas, California, Colorado, District of Columbia, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin and Wyoming. (States in which the Company actively writes property and casualty coverage are indicated in bold)..

Farmers Insurance Exchange was licensed in Colorado on November 6, 1930 as a reciprocal or inter-insurance exchange. Lines of Insurance the Company is currently authorized to sell encompass the following:

In 1995, the Company reported $309,708,135. in total written premiums for all lines of insurance written out of the Colorado Springs Regional office operations. Its Automobile market was $287,619,763. in written premiums, representing approximately 427,504 policies. This volume represents a 16.56% market share (according to the NAIC) of all Private Passenger Automobile insurance written in the State of Colorado.

PURPOSE AND SCOPE OF EXAMINATION

This market conduct report was prepared by independent examiners contracting with the Colorado Division of Insurance for the purpose of auditing certain business practices of insurers licensed to conduct the business of insurance in the State of Colorado. This procedure is in accordance with Colorado Insurance Law § 10-1-204, C.R.S., which empowers the Commissioner to supplement his resources to conduct market conduct exams. The findings in this report, including all work product developed in the production of this report, are the sole property of the Colorado Division of Insurance.

The market conduct examination covered by this report was performed on a routine basis to assist the Colorado Commissioner of Insurance to meet statutory requirements, by determining Company compliance with the Colorado Insurance Code and generally accepted operating principles. Additionally, findings of a market conduct examination serve as an aid to the Division of Insurance’s early warning system. The intent of the information contained in this report is to serve only those purposes.

This examination was governed by, and performed in accordance with, procedures developed by the National Association of Insurance Commissioners, the Colorado Division of Insurance, and the Insurance Regulatory Examiners Society. In reviewing material for this report the examiners relied primarily on records and material maintained by the Company. The examination period covered one calendar year of the Company’s operations, from January 1, 1995 to December 31, 1995.

File sampling was based on review of systematically selected samples of underwriting and claims files by category. Sample sizes were chosen based on guidance from procedures developed by the National Association of Insurance Commissioners. Upon review of each file, any concerns or discrepancies were noted on comment forms. These comment forms were delivered to the Company for review. Once the Company was advised of a finding contained in a comment form, the Company had the opportunity to respond. For each finding the Company was requested to agree, disagree or otherwise justify the Company’s noted action. At the conclusion of each sample, the Company was provided a summary of the findings for that sample. The report of the examination is, in general, a report by exception. Therefore, much of the material reviewed will not be contained in this written report, as reference to any practices, procedures, or files which manifested no improprieties were omitted.

An error tolerance level of plus or minus $10.00 was allowed in most cases where monetary values were involved, however, in cases where monetary values were generated by computer a $0 tolerance level was applied in order to identify possible system errors. Additionally, a $0 tolerance level was applied in instances were there appeared to be a consistent pattern of deviation from the Company’s rates on file with the Colorado Division of Insurance.

This report contains information regarding exceptions to the Colorado Insurance Code. The examination included review of the following four Company operations:

1. Complaint Handling

2. Underwriting Practices.

3. Rate Application.

4. Claims Settlement Issues.

All unacceptable or non-complying practices may not have been discovered throughout the course of this examination. Additionally, findings may not be material to all areas which would serve to assist the Commissioner. Failure to identify or criticize specific Company practices does not constitute acceptance by the Colorado Division of Insurance of such practices. This report should not be construed to endorse nor discredit any insurance company or insurance product. Statutory cites and regulation references are as of the period under examination unless otherwise noted. Examination report recommendations which do not reference specific insurance laws, regulations, or bulletins are presented to encourage improvement of company practices and operations and ensure consumer protection. Examination findings may result in administrative action by the Division of Insurance.

EXAMINATION REPORT SUMMARY

The examination resulted in a total of eleven (11) issues, arising from the Company’s apparent noncompliance with Colorado statutes and regulations concerning all property and casualty insurers operating in Colorado. These issues encompassed the following Company operations.

In the area of complaint handling, no compliance issues were noted.

In the area of underwriting, five (5) compliance issues are addressed in this report. These issues arise from Colorado statutory and regulatory requirements which must be followed whenever policies are issued, canceled, or non-renewed or the premiums increased or decreased. The incidence of noncompliance in the area of underwriting exhibits a frequency range of 2% to 100%. With regard to these six (6) underwriting practices, it is recommended that the Company review its underwriting procedures and make the necessary changes to assure future compliance with applicable statutes and regulations.

In the area of rating, no compliance issues were noted.

In the area of claim practices, six (6) compliance issues are addressed. These issues arise from Colorado statutory and regulatory requirements dealing with the fair and equitable settlement of claims, payment of claims checks, maintenance of records, timeliness of payments, accuracy of claim payment calculations, and delay of claims. The incidence of noncompliance in the area of claims practices shows a frequency range of error between 2% and 54%. In regard to the six (6) compliance issues in this area, it is recommended that the Company review its claims handling procedures and make the necessary changes to assure future compliance with applicable statutes and regulations.

PERTINENT FACTUAL FINDINGS

UNDERWRITING

Issue A: Failure to submit forms for Certification to the Colorado Division of Insurance.

Section 10-3-1104 (u), C.R.S., states:

Section 10-4-725 (2), C.R.S., Certification of policy and notice forms, states:

Colorado Regulation 1-1-6 (7), Annual filing of forms and certification by officer, states

The Company’s Automobile Private Passenger Forms Certification List, dated June 19, 1995, generated by the Home Office and submitted to the Colorado Division of Insurance for the examination period, was compared to all forms used during the examination period. One (1) form was noted as being used by the Company in their underwriting and claims handling procedures but not contained on the Certification list that was submitted to the Division of Insurance during the examination period. It is as follows:

• Notice of Increase in Premium (51-0834)

Within 30 days, the Company should be required to provided evidence demonstrating why the Company should not be considered in violation of Section 10-3-1104 (u), C.R.S., Section 10-4-725, C.R.S., and Regulation 1-1-6. In the event the Company is unable to provide such documentation, the Company should be required to provide evidence demonstrating that the Company has implemented procedures which will ensure complete Certification so that the y will comply with requirements of the Colorado Insurance Law.

Issue B: Failure to notify the insured of their possible eligibility for Automobile Liability insurance through an Assigned Risk Plan.

Section 10-4-606, C.R.S., "Further notice", states:

The following chart illustrates the significance of error versus the population and sample examined:

An examination of 50 files, representing 2% of all policies cancelled by the Company within the first 59 days, in Colorado during 1995, showed 50 instances (100% of the sample) wherein the Company issued cancellation notices that did not contain the notification to the insured of possible eligibility for Automobile Liability insurance through an Assigned Risk Plan (Colorado Motor Vehicle Insurance Plan) as well as notification specific to where the insured may obtain such information concerning the plan.

Within 30 days the Company should be required to provide documentation demonstrating why the Company should not be considered in violation of Section 10-4-606, C.R.S. In the event the Company is unable to provide such documentation, the Company should be required to provided evidence demonstrating that it has reviewed Company procedures and pertinent forms regarding Automobile policies cancelled within the first 59 days of inception to ensure that proper notification is contained on the cancellation form so that they will comply with requirements of the Colorado Insurance Law.

Issue C: Failure to provide 30 days written notice to the insured as to the Company’s intention of non-renewing the policy.

Section 10-4-720 (2), C.R.S., Cancellation - renewal - reclassification, states:

The following chart illustrates the significance of error versus the population and sample examined:

An examination of 50 files representing 2.19% of all policies non-renewed by the Company in Colorado during 1995, showed 3 instances (6% of the sample) in which a non-renewal notice was issued without giving the insured 30 days advance notice of its intent to non-renew the policy.

Within 30 days, the Company should provide documentation demonstrating why it should not be considered in violation of Section 10-4-720, C.R.S. In the event the Company is unable to provide such documentation, it should be required to provide evidence demonstrating that the Company has adopted and implemented procedures which will provide at least 30 days notice of its intention to non-renew Automobile policies in compliance with the requirements of Colorado Insurance Law.

Issue D: Failure of the Company to provide 10 days written notice of cancellation for nonpayment of premium.

Colorado Section 10-4-603 (1), C.R.S., "NOTICE", states:

The following chart illustrates the significance of error versus the population and sample examined:

An examination of 100 files, representing .0042% of all policies cancelled by the Company for nonpayment of premium in Colorado during 1995, showed 100 instances (100% of the sample) wherein the Company failed to substantiate compliance with § 10-4-603, C.R.S., which requires 10 days advance notice to the insured.

Notices of cancellation for nonpayment of premium are procedurally generated from the Home Office by computer direct to the insured. All physical documentation of this procedure is also retained in the Home Office by date order. The Regional office could not provide the examiners with this documentation to substantiate compliance with the above-captioned Colorado Insurance Law. Additionally, the Regional office computer system does not capture the date of when the notice for nonpayment of premium is actually sent to the insured, therefore, it was impossible for the examiners to ascertain compliance in this regard.

Within 30 days, the Company should provide documentation demonstrating why it should not be considered in violation of Section 10-4-603, C.R.S. In the event the Company is unable to provide such documentation, it should be required to provided evidence demonstrating that the Company has adopted and implemented procedures which will prove compliance with the requirements of Colorado Insurance Law.

Issue E: Failure of the Company’s Underwriting manual to state the correct "Experience Period", and " Accident Defined" when determining a surcharge.

Section 10-3-1104 (1)(f)(II), C.R.S., Unfair Discrimination, states:

Additionally, Colorado Regulation 5-2-3 (D), RULES LIMITING INSURERS' ACTIONS TO REFUSE TO WRITE, CANCEL, NONRENEW, INCREASE PREMIUM, OR REDUCE COVERAGES, states:

The examiners noted that the Company’s Underwriting manual conflicts with Colorado Regulation 5-2-3 (D). On renewals, the Company uses two guidelines from their manual in determination of Surcharges applicable due to accidents and/or tickets. In one criteria, they define "experience period" as 3 years and 6o days which does not comply with the stated Colorado Regulation using "3 years". In the second criteria the Company uses "accident defined", as $500 or Reserve Pending which also conflicts with Colorado Regulation stating "$500". Auto Renewals with tickets or accidents under the above-mentioned criteria are subjected to an increase in premium (or removal of the accident-free discount) which constitutes a 25% increase or in some cases, an offer to rewrite the policy in the Company with a higher rate, Mid-Century Insurance.

Within 30 days, the Company should provide documentation demonstrating why it should not be considered in violation of Section 10-3-1104 (1)(f)(II), C.R.S., and Regulation 5-2-3 (D). In the event the Company is unable to provide such documentation, it should be required to provided evidence demonstrating that the Company has adopted and implemented new underwriting procedures that will be in compliance with the requirements of Colorado Insurance Law.

CLAIMS PRACTICES

Issue F: Failure of the Company to obtain specific written assignment from the insured before issuing drafts.

Colorado Regulation 5-1-5 (III), Unfair Claims Settlement Practices, under the authority of Section 10-1-109, C.R.S., requires that:

The following chart illustrates the significance of error versus the population and sample examined:

An examination of 100 systematically selected claim files representing .0014% of all comprehensive and collision claims paid by the Company in 1995, showed two (2) instances (2% of the sample) in which the Company issued a check made payable to a third-party without a specific written assignment from the insured.

Within 30 days, the Company should provide written documentation demonstrating why the Company should not be considered in violation of Section 10-1-109, C.R.S., and Colorado Insurance Regulation 5-1-5 (III). In the event the Company is unable to provide such documentation, it should be required to provide written procedures showing that prior written assignment from the insured is required before checks are issued co-payable or directly payable to a repair or service facility.

Issue G: Failure to pay insurance claims in accordance with policy provisions and/or written Company claims handling procedures.

Section 10-3-1104(1)(h)( VI ), C.R.S., defines an unfair claims settlement practice as:

The Company’s Claims Representative Field Manual, Page D-11. (XV), Total Losses, Settlements, states, in part, the following,

The following chart illustrates the significance of error versus the population and sample examined:

An examination of 50 files, representing 1.1% of claims paid by the Company in 1995 in which a vehicle was declared a total loss, showed 27 instances (54% of the sample) wherein the Company either failed to pay the claims in accordance with their claims manual or failed to pay the claims in accordance with auto policy provisions.

There were twenty four(24) instances where the Company failed to follow their own Claims Manual with respect to paying transfer/license fees and these are detailed as follows:

There were three (3) instances where the Company failed to pay the correct total loss amount in accordance with auto policy provisions and these are detailed as follows:

Within 30 days, the Company should provide documentation demonstrating why it should not be considered to be in violation of Section 10-3-1104(1)(h)(VI), C.R.S. In the event the Company is unable to provide such documentation, the Company should be required to provide evidence that it has reviewed its procedures regarding the payment of taxes and fees when paying claims in which a vehicle is declared a total loss. After reviewing these procedures, the Company should be required to provide written evidence to assure claims in which a vehicle is declared a total loss will be paid in compliance with the Company’s Field Representative’s manual provisions and any applicable statutory requirements.

Additionally, the Company should be required to conduct a self audit of all total loss claims paid in Colorado from January 1, 1995 to present and make remuneration of any unpaid benefits as found by the audit.

Issue H: Failure to pay claims properly in which Comparative Negligence was used to deny or offset the adjustment of a claim without conducting a reasonable investigation.

Section 10-3-1104 (1)(h)(XV), C.R.S., defines an Unfair Claim Settlement Practice as:

The following charts illustrate the significance of error versus the population and sample examined:

An examination of 50 files, representing 1.1% of the claims paid by the Company in 1995 in which a vehicle was declared a total loss, showed 1 instances (or 2% of the sample) wherein the Company reduced the amount of a total loss to the third-party without conducting a reasonable investigation.

In this instance, the Company reduced the payment of a property damage liability total loss to the claimant by 25% on basis of speed and no evasive action. It appears to the examiners that the Company did not conduct a reasonable investigation in this matter. Except for the statements of both parties and an indication of 35 mph displayed on the police report, overall, the file lacks substantial developed investigative evidence in order to justify the Company’s action.

An examination of 50 files, representing 1.1% of claims paid by the Company in 1995 in which a claim was denied in Colorado, showed one (1) instance (or 2% of the sample) wherein the Company failed to pay a third-party loss using as its defense the Colorado Comparative Negligence Law.

In this instance the insured and claimant were both backing out of parking-lot stalls. According to the statements and point of impacts, the claimant had already backed out of the stall and was in the process of pulling-forward. The insured alleges that they did not see the claimant vehicle and began backing and immediately impacted the claimant vehicle in the right side. The Company totally denied the property damage liability claim on the basis of 50/50 equal negligence (which would normally bar recovery under the Colorado Negligence Law). Additionally, there is a remark in the adjuster’s notes indicating that he would have negotiated a 75/25% settlement with the claimant, however, the insured had no collision coverage eliminating the Company’s subrogation rights as an offset in the matter.

Within 30 days, the Company should provide documentation demonstrating why it should not be considered to be in violation of Section 10-3-1104(1)(h)(XV), C.R.S., Unfair Claims Settlement Practices.

Issue I: Delay of PIP benefit payments.

Section 10-4-708(1), C.R.S., requires:

Colorado Regulation 5-2-8 (III), Timely Payment of Personal Injury Benefits, (A)(B), Rules, states:

The following charts illustrate the significance of error versus the population and sample examined:

An examination of 100 systematically selected files, representing .0076% of all personal injury protection benefit claims paid by the Company in 1995, showed 11 instances (11% of the sample) wherein the Company failed to pay PIP claims within the statutory standard of 30 days.

An examination of 100 systematically selected canceled drafts, representing .0079% of all personal injury protection benefit claims paid by the Company in 1995, showed 6 instances (6% of the sample) wherein the Company failed to pay PIP claims within the statutory standard of 30 days.

Within 30 days, the Company should provide written documentation demonstrating why it should not be considered in violation of Section 10-4-708 (1), C.R.S., and Colorado Regulation 5-2-8 (III). In the event the Company is unable to provide such documentation, it should be required to provide evidence demonstrating the Company has reviewed its procedures pertaining to timely PIP benefit payments and show that the Company has implemented procedures which will ensure future compliance with the Colorado Insurance Law.

Issue J: Failure to obtain specific written assignment from insureds prior to making direct payment of PIP benefits to health care providers

Section 10-4-708.4(1)(a), C.R.S., provides for the direct payment of benefits as follows:

Section 10-4-708.4(2), C.R.S., provides in part:

In addition, Colorado Insurance Regulation 5-1-5 (III), authorized by Section 10-1-109(1), C.R.S., states:

The following charts illustrate the significance of error versus the population and sample examined:

An examination of 100 systematically selected files, representing .0076% of all personal injury protection benefit claims paid by the Company in 1995, showed 19 instances (19% of the sample) wherein the Company failed to obtain written assignments from insureds prior to making direct payment of PIP benefits to health care providers.

An examination of 100 systematically selected canceled drafts, representing .0079% of all personal injury protection benefit claims paid by the Company in 1995, showed 42 instances (42% of the sample) wherein the Company failed to obtain written assignments from insureds prior to making direct payment of PIP benefits to health care providers.

Within 30 days, the Company should provide written documentation demonstrating why the Company should not be considered in violation of Section 10-4-708.4, C.R.S., and Colorado Insurance Regulation 5-1-5 (III). In the event the Company is unable to provide such documentation, it should be required to provide written procedures showing that prior written assignment from the insured is required before making direct payment of personal injury protection benefits.

Issue K: Failure to maintain claims file documentation.

Section 10-4-708(1), C.R.S., requires:

Colorado Regulation 1-1-7 (3) , Record Retention, states in part:

The following chart illustrates the significance of error versus the population and sample examined:

An examination of 100 systematically selected files, representing .076% of all personal injury protection benefit claims paid by the Company in 1995, showed three (3) instances where the Company failed to document billing statements with the "date received". This lack of documentation prevented the examiners from determining compliance with Section 10-4-708 (1),C.R.S.

In one (1) instance (1% of the sample), the Company failed to document the file as to criteria for a Loss of Earnings (LOE) payment coordination in conjunction with a Workers’ Compensation primary reimbursement.

Within 30 days, the Company should provide documentation demonstrating why it should not be considered to be in violation of Section 10-4-708(1), C.R.S., and Colorado Regulation 1-1-7. In the event the Company is unable to provide such documentation, the Company should be required to provide evidence that it has reviewed all procedures related to documentation of the billing statements as to the date received, has implemented all necessary changes to assure compliance with the Colorado Insurance Law.

SUMMARY OF RECOMMENDATIONS LOCATOR

Independent Market Conduct Examiners

LARRY N. CAMPBELL, CIE

&

JAMES T. AXMAN, AIE

participated in this examination and in the preparation of this report.