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(ii) for each method of competition, act or practice which the company did

not know nor reasonably should have known was in violation of the law,

a penalty of not more than one thousand dollars ($1,000.00).

(d) Respondent's violations of Sections 3(a)(2) and 3(a)(5) of Act 86 (40 P.S.

§§ 3403), are punishable under Section 8 (40 P.S. § 3408) of this act by one or

more of the following causes of action:

(i) Order that the insurer cease and desist from the violation.

(ii) Impose a fme or not more than $5,000 for each violation.

(e) Respondent's violations of Section 506.1 of the Insurance Company Law, No.

284 (40 P .S. § 636.1) are punishable by the following, under 40 Purdons

Statutes, Section 637, by one or more of the following causes of action:

(i) Suspend or revoke the license of such offending person or entity.

(ii) Refuse for a period not to exceed one year, to issue a new license to

such offending person or entity.

~

Ii (iii) Impose a penalty of not more than $1,000 for each act in violation.,~.,i,

7

. - .

~:~~.., ,

~)jk~-

(iv) Any person or entity which willfully issues contracts of fire insurance

contrary to Sections 506 of this act shall be guilty of a misdemeanor.

(f) Respondent's violations of Section 4 of the Casualty and Surety Rate

Regulatory Act, No. 246 (40 P.S. § 1184) are punishable under

Section 16 of the Casualty and Surety Rate Regulatory Act:

(i) imposition of a civil penalty not to exceed $50 for each violation or

not more than $500 for each such wilful violation;

(ii) suspension of the license of any insurer which fails to comply with an

Order of the Commissioner within the time limited by such Order, or any

extension thereof which the Commissioner may grant.

(g) Respondent's violations of Title 31, Pennsylvania Code, Section 146.6 are

punishable under Sections 9, 10 and 11 of the Unfair Insurance Practices Act

(40 P.S. §§ 1171.9, 1171.10 and 1171.11), as cited above.

ORDER

5. In accord with the above Findings of Fact and Conclusions of Law, the Deputy

Insurance Commissioner orders and Respondent consents to the following:

8

- -

!J ~

(a) Respondent shall cease and desist from engaging in the activities described

herein in the Findings of Fact and Conclusions of Law.

(b) Respondent shall file an affidavit stating under oath that it will provide each

of its directors, at the next scheduled directors meeting, a copy of the adopted

Report and related Orders. Such affidavit shall be submitted within thirty (30)

days of the date of this Order.

(c) Respondent shall comply with all recommendations contained in the attached

Report.

(d) Respondent shall pay Five Thousand Dollars ($5,000.00) to the

Commonwealth of Pennsylvania in settlement of all violations contained in

the Report.

(e) Payment of this matter shall be made by check payable to the Commonwealth

of Pennsylvania. Payment should be directed to Sharon L. Harbert,

Administrative Assistant, Bureau of Enforcement, 1311 Strawberry Square,

Harrisburg, Pennsylvania 17120. Payment must be made no later than thirty

(30) days after the date of this Order.

9

0 ..

6. In the event the Deputy Insurance Commissioner finds that there has been a

breach of any of the provisions of this Order, based upon the Findings of Fact and

Conclusions of Law contained herein may pursue any and all legal remedies available,

including but not limited to the following: The Deputy Insurance Commissioner may

enforce the provisions of this Order in the Commonwealth Court of Pennsylvania or in

any other court of law or equity having jurisdiction; or the Deputy Insurance

Commissioner may enforce the provisions of this Order in an administrative action

pursuant to the Administrative Agency Law, ~ or other relevant provision of law.

7. Alternatively, in the event the Deputy Commissioner finds that there has been a

breach of any of the provisions of this Order, the Deputy Commissioner may declare

this Order to be null and void and, thereupon, reopen the entire matter for appropriate

action pursuant to the Administrative Agency Law, ~, or other relevant provision

of law.

8. In any such enforcement proceeding, Respondent may contest whether a breach

of the provisions of this Order has occurred but may not contest the Findings of Fact

and Conclusions of Law contained herein.

9. Respondent hereby expressly waives any relevant statute of limitations and

application of the doctrine of laches for purposes of any enforcement of this Order.

I

'I

10. This Order constitutes the entire agreement of the parties with respect to the

matters referred to herein, and it may not be amended or modified except by an

amended order signed by all the parties hereto.

11. This Order shall be final upon execution by the Deputy Insurance

Commissioner. Only the Insurance Commissioner or a duly authorized Deputy

Insurance Commissioner is authorized to bind the Insurance Department with respect

to the settlement of the alleged violations of law contained herein, and this Consent

Order is not effective until executed by the Insurance Commissioner or a duly

authorized Deputy Insurance Commissioner.

BY: FARMERS' & MECHANICS' MUTUALINSURANCE COMP ANY, Respondent

~~:~~ ,... . )::.):..,t.I..- ()President / ~ ~~ei~Q~~t

IL: ruI.;£QJ!Secretary 1

HDeputy Insurance CommissionerCommonwealth of Pennsylvania

11

J '

L INTRODUCTION

The market conduct examination was conducted at Farmers' and Mechanics'

Mutual Insurance Company's office located in Forksville, Pennsylvania, from

June 23, 2003, through June 27,2003. Subsequent review and follow-up was

conducted in the office of the Pennsylvania Insurance Department.

Pennsylvania Market Conduct Examination Reports generally note only those

items to which the Department, after review, takes exception. However, the

Examination Report may include management recommendations addressing areas

of concern noted by the Department, but for which no statutory violation was

identified. This enables Company management to review those areas of concern

in order to determine the potential impact upon Company operations or future

compliance. A vIolation is any instance of Company activity that does not comply

with an insurance statute or regulation. Violations contained in the Report may

result in imposition of penalties.

In certain areas of review listed in this Report, the examiners will refer to "error

ratio." This error ratio is calculated by dividing the number of policies with

violations by the total number of policies reviewed. For example, if 100 policies

are reviewed and it is detemlined that there are 20 violations on 10 policies, the

error ratio would be 10%.

Throughout the course of the examination, Company officials were provided with

status memoranda, which referenced specific policy numbers with citation to each

section of law violated. Additional information was requested to clarify apparent

violations. An exit conference was conducted with Company personnel to discuss

the various types of violations identified during the examination and review

written summaries provided on the violations found.

1..,

The courtesy and cooperation extended by the officers and employees of the

Company during the course of the examination is hereby acknowledged.

The undersigned participated in this examination and in preparation of this Report.

C~~~..:; ;(. W ./

Ch~~~~~-~~;t~?~jE~HiAMarket Conduct Division Chief

--:;U1 ~/i1J ()~"\.A J

--~-:--:::---~.L~Metro OrangeMarket Conduct Examiner

2

IL SCOPE OF EXAMINATION

The Market Conduct Examination was conducted on Farmers' and Mechanics'

Mutual Insurance Company, hereinafter referred to as "Company," at their office

located in Forksville, Pennsylvania. The examination was conducted pursuant to

Sections 903 and 904 (40 P.S. §§323.3 and 323.4) of the Insurance Department

Act and covered the experience period of January 1, 2002, through December 31,

2002, unless otherwise noted. The purpose of the examination was to determine

the Company's compliance with Pennsylvania insurance laws and regulations.

The examination focused on Company operations in the following areas:

1. Personal Lines Property

. Underwriting - Appropriate and timely notices of nonrenewals, midterm

cancellations, 60-day cancellations.

. Rating - Proper use of all classification and rating plans and procedures.

2. Dwelling Fire

. Rating - Proper use of all classification and rating plans and procedures.

3 . Commercial Property

. Underwriting - Appropriate and timely notices of nonrenewals, midterm

cancellations, 60-day cancellations and renewals.

4. Claims

5. Forms

6. Advertising

3

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~~!J/I\ o~ 18Aoodd8 ~A!OOQl Auedm°J ~qJ 'l8~A ~W8S ~~ . £861 U! AuedwOJ

~ue.msuI 18mnW ,S~!U'Bq~W "18 ,SJaWJBd O} ~umu J!~qJ p~~ueq~ AuedwoJ ~~

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9

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aJ!d :aJaM Ma!AaJ S!1{JjO SUaJ'B aqJ 0) pa)B[aJ awnloA wn!WaJd .Vt9'EEl'ES S8

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I~ UNDERWRITING PRACTICES AND PROCEDURES~-- ~--- - --- --- As part of the examination, the Company was requested to supply underwriting

guides, bulletins, directives or other forms of underwriting procedure

communications for each line of business being reviewed. Underwriting guides

were furnished for homeowners, dwelling fire, mobile homeowners, inland marine

and commercial lines. The purpose of this review was to identify any

inconsistencies which could be considered discriminatory, specifically prohibited

by statute or regulation, or unusual in nature. The following violation was noted.

1 Violation Act 205, Section 5(a)(4) [40 P.S. §1171.5(a)(4)]

Unfair Methods of Competition and Unfair or Deceptive Acts or

Practices Defined. Entering into any agreement to commit, or by

any concerted action committing, any act of boycott, coercion or

intimidation resulting in or tending to result in unreasonable resttaint

of, or monopoly in, the business of insurance. The Company

requited supporting business for liability coverage.

II

J-: UNDERWRITING

A. Personal Lines Property

~ -.c' 1. 60-Day Cancellations

1A 60-day cancellation is considered to be any policy, which was cancelled

within the first 60 days of the inception date of the policy.

The primary purpose of the review was to determine compliance with Act

205, Unfair Insurance Practices Act, Section 5(a)(7)(iii) [40 P .S.

§1171.5(a)(7)(iii)], which prohibits an insurer from canceling a policy for

discriminatory reasons and Title 31, Pennsylvania Code, Section 59 .9(b),

which requires an insurer who cancels a policy in the first 60 days to

provide at least 30 days notice of the termination.

From the universe of 60 homeowner policies, which were cancelled within

the first 60 days of new business, 28 files were selected for review. All 28

files selected were received and reviewed. No violations were noted.

2. Midterm Cancellations;,':',".. A midterm cancellation is any policy termination that occurs at any time

::~ other than the twelve-month policy anniversary date.

The primary purpose of the review was to determine personal lines

compliance with Act 205, Unfair Insurance Practices Act, Section 5(a)(9)

[40 P.S. §1171.5(a)(9)], which establishes the conditions under which

cancellation of a policy is permissible along with the form requirements of

the cancellation notice.

~J!::;;:

'c,..'

8 ;;~~v~

'" r

::.-

~ From the universe of 711 personal lines property policies, which were

cancelled midterm during the experience period, 127 files were selected for

review. The property policies consisted of homeowners, tenant

homeowners, owner occupied dwelling fire and inland marine. All 127

files requested were received and reviewed. No violations were noted.

3. ~enew~A nomenewal is considered to be any policy, which was not renewed, for a

specific reason, at the normal twelve-month anniversary date.

The primary purpose of the review was to determine personal lines

compliance with Act 205, Unfair Insurance Practices Act, Section 5 (a) (9)

[40 P.S. §1171.5(a)(9)], which establishes the conditions ~derwhichcancellation of a policy is permissible along with the form requirements of

the nomenewal notice.

The universe of 26 personal lines property policies, which was nomenewed

during the experience period, was selected for review. The property

policies consisted of homeowners, tenant homeowners, inland marine and

boat owners. All 26 files requested were received and reviewed. The 20

violations were based on 20 files, resulting in an error ratio of77%.

the following findings were made:

18 Violations Act 205, Section 5 (a) (9) [40 P.S. §1171.5(a)(9)]

Prohibits canceling any policy of insurance covering owner-

occupied private residential properties or personal property of

individuals that has been in force for sixty days or more or

refusing to renew any such policy unless the policy was

!f~'~"~""""""';'c;"'ff~c, 9

v

/ {~c"~1i~~!~\ . fraudule1\t

. l!eselltatl01l,o"lame" t'lltO\lo&h roa\!i\\\\ \l\\ge\?\",~\ \)\ \~c\ ~l.en~\ \.() \\\e

. . ~ at CQ\\~e~\\.~~s\'3.\emel\\~, am\~~\a\'l( ~

'a.~~~~\'(\\\~~ \Jl \!I.~ l\y,\ ~l \~ \\~ \\m\~ ~~\\\~ \~ ~ ~

company; or there has been a substantial change or increase

in hazard in the risk assumed by the company subsequent to

the date the policy was issued; or there is a substantial

increase in hazards insured against by reason of willful or

negligent acts or omissions by the insured; or the insured has

failed to pay any premium when due or for any other reasons

approved by the Commissioner. The 18 violations were the

result of policies nonrenewed for an improper reason.

2 Violations Act 205, Section 5(a)(9)(iii) [40P.S. §1171.5(a)(9)(iii)]

Requires that a cancellation notice shall state the specific

reason or reasons of the insurer for cancellation. The Z

violations were due to nonrenewal notices being issued that

did not provide a specific reason for the nonrenewal.

B. Commercial Property

1. 60-Day Cancellations

A 60-day cancellation is considered to be any policy, which was cancelled

within the first 60 days of the inception date of the policy.

The primary purpose of the review was to determine compliance with Act

86, Section 7 (40 P .S. §3407), which requires an insurer, who cancels a

policy that is in effect less than 60 days, to provide 30 days notice of

termination no later than the 60th day ~less the policy provides for a longer

period of notification.

The universe of 34 commercial property policies, which was cancelled

within the first 60 days, was selected for review. The commercial property

files consisted of commercial fire, tenant occupied dwelling fire and farm

owners. All 34 files selected were received and reviewed. No violations

were noted.

2. Midterm Cancellations

A midterm cancellation is any policy termination that occurs at any time

other than the twelve-month policy anniversary date.

The purpose of the review was to determine compliance with Act 86,

Section 2 (40 P .S. §3402), which prohibits cancellation except for specified

reasons and Section 3 (40 P .S. §3403), which establishes the requirements,

which must be met regarding the form and condition of the cancellation

notice.

From the universe of 406 commercial property policies, which were

cancelled during the experience period, 65 files were selected for review.

The commercial property files consisted of commercial fire, tenant

occupied dwelling fire and farm owners. All 65 files selected were

received and reviewed. No violations were noted.

3. Nonrenewals- A nonrenewal is considered to be any policy that was not renewed, for a

specific reason~ at the normal twelve-month policy anniversary date.

The review was conducted to determine compliance with Act 86, Section 3

(40 P .S. §3403), which establish~s the requirements that must be met

regarding the form and condition of the nonrenewal notice.

11

1

The universe of 10 commercial property policies identified as nonrenewals

by the Company was selected for review. The commercial property

policies consisted of tenant occupied dwelling fire and farm owners. All 10

files selected were received and reviewed. The 5 violations were based on

5 files, resulting in an error ratio of 50%.

The following findings were made:

4 Violations Act 86, Section 3(a)(2) [40 P.S. §3403(a)(2)]

Requires that a nonrenewal notice be forwarded directly to

the named insured or insureds at least 60 days in advance of

the effective date of the tennination. The 4 files noted were

absent any evidence this requirement was complied with.

1 Violation Act 86, Section 3 (a) (5) [40 P.S. §3403(a)(5)]

Requires that a cancellation notice shall state the specific

reasons for cancellation. The reasons shall identify the

condition, factor or loss experience, which caused the

cancellation. The notice shall provide sufficient information

or data for the insured to correct the deficiency. The file

noted was absent any evidence this requirement was complied

with.

4. Renewals

A renewal is considered to be any policy, which was previously written by

the Company and renewed on the normal twelve-month anniversary date.

12

II






£1

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su P~!J~U~P! S~IIJ Ap~doJd {U!~J~mwo~ 861'£Jo ~~A!Un ~q1 mold

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VI. RATING

A. Homeowners

1. New Business

New business, for the purpose of this examination, was defined as policies

written for the first time by the Company during the experience period.

The purpose of the review was to measure compliance with Act 246,

Sections 4( a) and (h) (40 P. S. § 1184), which require every insurer to file

with the Insurance Commissioner every manual of classifications, rules and

rates, every rating plan and every modification of any rating plan, which it

proposes to use in the Commonwealth. Also, no insurer shall make or issue

a contract or policy except in accordance with filings or rates, which are in

effect at the time.

Homeowners - New Business Without Surcharges

From the universe of 2,013 homeowner policies written as new business

without surcharges during the experience period, 100 files were selected for

review. All 100 files selected were received and reviewed. No violations

were noted.

2. Renewals

A renewal is considered to be any policy which was previously written by


The purpose of the review was to determine compliance with Act 246,

Sections 4( a) and (h) (40 P. S. § 1184), which require every insurer to file


rates, every rating plan and every modification of any rating plan which it

14

..1 " ,:


a contract or policy except in accordance with filings or rates which are in

effect at the time.

Homeowners - Renewals Without Surcharges

From the universe of 3,233 homeowner policies written as renewals

without surcharges during the experience period, 100 files were selected for

review. All 100 files selected were received and reviewed. The violation

noted resulted in an error ratio of 1 %.

The following finding was made:

1 Violation Act 246, The Casualty and Surety Rate Regulatory Act,

Section 4 (40P.S. §1184)

Requires every insurer to file with the Insurance

Commissioner every manual of classifications, rules and

rates, every rating plan and every modification of any rating

plan, which it proposes to use in the Commonwealth. Also,

no insurer shall make or issue a contract or policy except in

accordance with filings or rates, which are in effect at the

time of issue. The violation noted was due to an improper

rating group, which resulted in an overcharge of $27.

B. Dwelling ¥ire

1. New Business

New business, for the purpose of this examination, was defined as policies

written for the first time by the Company during the experience period.

15

;il:'(,'!

The purpose of the review was to measure compliance with Act 246,

Sections 4(a) and (h) (40 P .S. §1184), which require every insurer to file


rates, every rating plan and every modification of any rating plan, which it


a contract or policy except in accordance with filings or rates, which are in

effect at the time.

From the universe of 1,169 dwelling fire policies written as new business

during the experience period, 50 files were selected for review. All 50 files

selected were received and reviewed. The 45 violations were based on the

universe of 1,169 which resulted in an error ratio of 4%.


45 Violations Act 246, The Casualty and Surety Rate Regulatory Act, ,

Section 4 (40 P.S. §1184)




plan, which it proposes to use in the Commonwealth. Also,


accordance with filings or rates, which are in effect at the

time of issue. An error was discovered in the rating process

on all policies with a seasonal factor and a protective device

credit. From the universe of 1,169 dwelling fire policies

written as new business, 45 policies were affected. The

Company'~ computer system applies a seasonal factor of 1.5

and a protective device credit of 5%, while the filed and

16

.. '

if !

I

approved seasonal factor should be 1.6 and protective device

credit should be 2%. This resulted in undercharges of $676.

2. Renewals

A renewal is considered to be any policy which was previously written by


The purpose of the review is to determine compliance with Act 246,

Sections 4( a) and (h) (40 P. S. § 1184), which requires every insurer to file

with the Insurance Commissioner every manual of classifications, roles and

rates, every rating plan and every modification of any rating plan which it


a contract or policy except in accordance with filings or rates which are in

effect at the time.

From the universe of 834 dwelling fire policies renewed during the

experience period, 50 files were selected for review. All 50 files selected

were received and reviewed. The 675 violations were based on the

universe of 834, which resulted in an error ratio of 81 %.


675 Violations Act 246~ The Casualty and Surety Rate Regulatory Act~

Section 4 (40P.S. §1184)




plan, which it P!oposes to use in the Commonwealth. Also,


17

I

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poo 9' I Qq Plnoqs JO}'J~J I~UO~QS PQAOJdd~ poo P~IY

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VIL CLAIMS

The Company was requested to provide copies of all established written claim

handling procedures utilized during the experience period. Written claim handling

procedures were received and reviewed for any inconsistencies, which could be

considered discriminatory, specifically prohibited by statute or regulati~.n, or

unusual in nature. No violations were noted.

The Claims review consisted of the following areas of review:

A. Homeowner Claims

B. Dwelling Fire Claims

The primary purpose of the review was to determine compliance with Title 31,

Pennsylvania Code, Chapter 146, Unfair Claims Settlement Practices. The files

were also reviewed to determine compliance with Act 205, Section 4 (40 P .S.

§1171.4) and Section 5(a)(10)(vi) [40 P .S. §1171.5{a)(10)(vi)], Unfair Insurance

Practices Act.

A. Homeowner Claims

From the universe of 365 homeowner claims reported during the experience

period, 75 files were selected for review. All 75 files selected were

received and reviewed. The 3 violations were based on 3 files, resulting in

an error ratio of 4%.


3 Violations Title 31, Pa. Code, Section 146.6

Every insurer shall complete investigation of a claim within

30 days after notification of the claim, unless such

19

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!)NISI.LN~(JY XI

X CONSUMER COMPLAINTS

The Company was requested to identify all consumer comp'aints received during

the experience period and provide copies of their consumer complaint logs for the

preceding four years. The Company identified 17 consumer complaints received

during the experience period and provided all consumer complaint logs requested.

AlII? complaints reported were selected for review. All 17 files selected were

received and reviewed.

The purpose of the review was to determine compliance with the Unfair Insurance

Practices Act, No. 205 (40 P .S. §1171). Section 5(a)(II) of the Act requires a

Company to maintain a complete record of aft complaints received during the

preceding four years. This record shall indicate the total number of complaints,

their classification by line of insurance, the nature of each complaint, the

disposition of these complaints and the time it took to process each complaint.

The following fmdings were made:

1 Violation Act 205, Section 5(a)(9) [40P.S. §1171.5(a)(9)]

Prohibits canceling any policy of insurance covering owner-

occupied private residential properties or personal property of

individuals that has been in force for sixty days or more or refusing

to renew any such policy unless the policy was obtained through

material misrepresentation, fraudulent statements, omissions or

concealment of fact material to the acceptance of the risk or to the

hazard assumed by the company; or there has been a substantial

change or increase in hazard in the risk assumed by the company

subsequent to the date the policy was issued; or there is a substantial

increase in hazards insured against by reason of willful or negligent

23

acts or omissions by the insured; or the insured has failed to pay any

premium when due or for any other reasons approved by the

Commissioner. The file noted contained an improper reason to

nomenew the policy.

1 Violation Act 205, Section 5(a)(9)(iii) [40P.S. §1171.5(a)(9)(iii)]

Requires that a cancellation notice shall state the specific reason or

reasons of the insurer for cancellation. The violation was due to a

cancellation notice being issued that did not provide a specific

reason for the cancellation.

1 Violation Insurance Company Law, Section 506.1 [40 P.S. §635.1]

After-Death Continuation of Basic Property Insurance. ( a) Basic

property insurance shall be continued one hundred and eighty days

after the death of the named insured on the policy or until the sale of

the property, whichever event occurs first provided that the

premiums for the coverage are paid. The Company did not provide

continuation of coverage 180 days after the date of the named

insured or until the sale of the property.

.1 Violation Act205, Section 5(a)(11) [40P.S. §1171.5(a)(11)]

Requires an insurer to maintain a complete record of all the

complaints, which it has received during the preceding four years.

This record shall indicate the total number of complaints, their

classification by line of insurance, the nature of each complaint, the

disposition of these complaints and time it took to process each

complaint. The violation noted was the result of the Company not

maintaining a complete complaint record. The complaint record did

not classify the complaint by line of business.

24

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9NISNH.JI7 1X

XIL RECOMMENDATIONS

The recommendations made below identify corrective measures the Department

finds necessary as a result of the number of some violations, or the nature and

severity of other statutory or regulatory violations, noted in the Report.

1. The Company must review Act 205, Section 5 [40 P .S. § 1171.5] to

ensure that violations relative to property nomenewals noted in the

Report do not occur in the future.

2. The premium overcharge noted in the rating section of this report must

be refunded to the insured and proof of such refund must be provided to

the Insurance Department within 30 days of the report issue date.

3. The Company must review and re-program their computer system, to

ensure policies are being rated correctly and are in compliance with Act

246, Section 4 (40 P .S. § 1184) so that the violations noted in the Report

do not occur in the future.

4. The Company must review Act 205, Section 5(a)(4) [40 P .S.

§1171.5(a)(4)] to ensure that the vi01ation relative to supporting

coverage noted in the Report does not occur in the future.

~,';ict!i,,;,!~.~~_Jlti.'

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