FARMERS INSURANCE COMPANY OF OREGON TIGARD, OREGON by idp20345

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									              STATE OF OREGON



DEPARTMENT OF CONSUMER AND BUSINESS SERVICES



             INSURANCE DIVISION



   REPORT OF MARKET CONDUCT EXAMINATION



                     OF



  FARMERS INSURANCE COMPANY OF OREGON
             TIGARD, OREGON


          NAIC COMPANY CODE 21636



                   AS OF



                JUNE 30, 1998
                                                TABLE OF CONTENTS


SCOPE OF EXAMINATION ............................................................................................4
DESCRIPTION OF COMPANY ......................................................................................5
    Affiliates ..........................................................................................................................5
    Management and Control ...............................................................................................6
       Board of Directors.......................................................................................................6
       Officers........................................................................................................................6

COMPLAINT HANDLING PRACTICES .......................................................................7
    Findings ..........................................................................................................................9

UNDERWRITING AND RATING .................................................................................12
    Findings ........................................................................................................................14
       Additional Findings and Procedures .......................................................................23

CLAIMS ............................................................................................................................24
    Findings ........................................................................................................................25
       Additional Findings .................................................................................................37

COMPLIANCE WITH PRIOR EXAMINATION RECOMMENDATIONS...............38
CONCLUSION.................................................................................................................39
MANAGEMENT AFFIRMATION .................................................................................41
ACKNOWLEDGMENT ...................................................................................................42
AFFIDAVIT......................................................................................................................43
APPENDIX A ...................................................................................................................44
    Complaints ....................................................................................................................44
    Underwriting and Rating .............................................................................................44
    Claims ...........................................................................................................................45
November 3, 1999




Honorable Michael Greenfield, Director
Department of Consumer and Business Services
State of Oregon
350 Winter Street NE, Room 440-4
Salem, Oregon 97310


Dear Director:

In accordance with your instructions and pursuant to ORS 731.300, we have examined

the business affairs of


                      Farmers Insurance Company of Oregon
                             13333 SW 68th Parkway
                              Tigard, Oregon 97223

                           NAIC Company Code 21636


hereinafter referred to as the “Company.”   The following report of examination is

respectfully submitted.




                                        3
                              SCOPE OF EXAMINATION

The market conduct examination of the Company was conducted as of June 30, 1998,

covering the period of July 1, 1997 through June 30, 1998, and included a review of

material transactions or events which occurred subsequent to the examination cut-off

date and were noted during the examination.


The last market conduct examination of the Company was as of March 31, 1995.


A standard focus examination was performed.         The examination did target specific

products. The examination of the Company was conducted pursuant to ORS 731.300

and in accordance with procedures and guidelines established by the Oregon Insurance

Division’s Market Conduct Program.         The program generally follows the Market

Conduct Examination Handbook as adopted by the NAIC to the extent that it is

consistent with Oregon law. The purpose was to determine the Company's ability to

fulfill and manner of fulfillment of its obligations, the nature of its operations, whether

it has given proper treatment to policyholders, and its compliance with the Oregon

Insurance Code and Administrative Rules.


In order to determine the practices and procedures of the Company's operations, one or

more of the following procedures was performed in each phase:

       1. A sample of files was selected from listings provided by the Company. The
       examiner then reviewed each file.

       2. The procedure manuals and/or memorandum were evaluated.

       3. The Company responded to a series of questions regarding the phase being
       examined.

The examination was comprised of the following three phases:

       Complaint Handling Practices
       Underwriting
       Claims Handling Practices


                                            4
                             DESCRIPTION OF COMPANY

The Company was granted a permit to organize on July 15, 1970, by the Oregon

Insurance Division.    The Company received a Certificate of Authority to transact

property, casualty (excluding workers’ compensation, marine and transportation, and

surety lines of business) on September 15, 1970.         The Company’s Certificate of

Authority was amended to include workers’ compensation within the Company’s

authorized lines of business in December 1987.


Affiliates

The Company is a member of a holding company with multiple insurance and

noninsurance affiliates.    Overall, the Farmers Insurance Group of Companies (the

Group) includes 18 property casualty insurance companies, one reinsurance company,

and one life company.      The property casualty insurance companies consist of three

reciprocals, 14 stock companies, and one mutual company. All of the companies in the

group are owned or managed by Farmers Group, Inc., dba Farmers Underwriters

Association. Farmers Group, Inc., is owned by South Western Nominees, Ltd., which is

owned by B.A.T Industries, p.l.c., the ultimate parent of the Group. Farmers Group

Inc., was acquired by B.A.T Industries, p.l.c., in December 1988.


Originally, the Company was 70% owned by Farmers Insurance Exchange, 20% owned

by Truck Insurance Exchange, and 10% owned by Fire Insurance Exchange. Farmers

Insurance Exchange (hereinafter referred to as the “Parent” or the “Parent Company”)

is the majority stockholder and it files a holding company registration statement on

behalf of the Company pursuant to the provisions of ORS 732.564 and OAR 836-27-010.

Fire Insurance Exchange sold its 10% ownership to the parent company in 1992

resulting in the current ownership composition. At the time of the examination, the

parent company owned 80% and Truck Insurance Exchange retained 20% ownership.

                                            5
 Farmers Insurance Exchange is an interinsurance exchange managed by Farmers

Group, Inc., as attorney-in-fact. The Truck Insurance Exchange is an interinsurance

exchange managed by Farmers Group, Inc.


Management and Control

Board of Directors

The members of the Board of Directors serving as of June 30, 1998, were:


 Name                       Principal Affiliation                  Director Since

 Deborah R. Settle          President                              March 24, 1997
 Tigard, OR                 Farmers Insurance Company of Oregon

 Martin D. Feinstein        President and CEO                      March 22, 1995
 Los Angeles, CA            Farmers Group, Inc.
                            Vice President
                            Farmers Insurance Company of Oregon

 James A. MacKinnon         Executive Vice President               March 24, 1997
 Los Angeles, CA            Farmers Group, Inc.
                            Vice President
                            Farmers Insurance Company of Oregon

 Dana Doak                  Treasurer                              March 22, 1988
 Tigard, OR                 Farmers Insurance Company of Oregon

 Gerald A. Roth             Human Resources Manager                June 30, 1977
 Tigard, OR                 Northwest Service Center

 Daniel F. Davison          District Manager                       October 15, 1991
 Lake Oswego, OR            District 73-33

 Douglas Harness            District Manager                       October 15, 1991
 Portland, OR               District 73-30


Officers

Operating management of the Company as of June 30, 1998, was under the direction of

the following principal officers:




                                               6
 Name                                     Office

Deborah R. Settle, CPCU                  President
Martin D. Feinstein                      Vice President
James A. MacKinnon                       Vice President
Thomas M. Boyden                         Vice President
Reginald Meyer                           Vice President
Harold D. Brungardt                      Vice President
John H. Lynch, CPCU, CLU, GCA            Vice President
Warren B. Tucker, FCAS                   Vice President
Edward A. Morris                         Vice President
Rubin Snowden                            Vice President
Dana L. Doak                             Treasurer
John M. Nelson                           Secretary
Gerald E. Faulwell, CPA                  Asst. Treasurer
Hubert L. Mountz                         Asst. Treasurer
Laszlo G. Heredy, CFA                    Asst. Treasurer
Maryann Seltzer                          Asst. Secretary
Alan F. Porter                           Asst. Secretary


                       COMPLAINT HANDLING PRACTICES

The following information is taken from the Company’s written procedures. The

Company’s definition of a consumer complaint is:

      Any communication expressing a grievance from policyholders, claimants and
      the Insurance Department.


The following guidelines are used to determine whether a communication is a legitimate

consumer complaint:

      1. All complaints of any kind from the Insurance Department must be included.

      2. First time communications concerning:

         a.   Improper conduct by an employee or agent;
         b.   Questionable claims handling;
         c.   Unreasonable delays;
         d.   Unfair or discriminatory policy decline or cancellation.

      3. Second time communications about a:

         a. Mistake or error;
         b. Repair;
         c. Request for information if we ignored or failed to properly handle the first
            request.




                                             7
        Note: First time communications on a mistake or error will not be considered a
        complaint. Complaint occurs only in failure to handle promptly.

       4. Agency complaints about commissions, underwriting rules, company policy

          and overall policy service are not to be considered consumer complaints. If,

          however, an agency complaint on behalf of an insured falls within the

          definition of a consumer complaint, it should be recorded.


       5. Whenever there is a question as to whether communication is a consumer

          complaint, apply this test: Have we followed good business practices? These

          practices involve issuing our policies and settling claims in a fast, fair and

          friendly manner, plus handling and correcting mistakes promptly.


Complaints from the Insurance Division are forwarded to the state executive director.

A quality control tracking form is assigned to the case and the complaint is referred to

the appropriate department head for research and response.        The department head

sends the Company’s response to the Insurance Division. Copies of the response along

with the completed quality control tracking form are forwarded to the state executive

director and the case is recorded in the complaint register.


Complaints not involving the Insurance Division are assigned a quality control tracking

form and routed directly to the supervisor or manager whose area will handle the

complaint. That supervisor or manager is responsible for ensuring the complaint does

not become lost, forgotten or unreasonably delayed.       Upon completion, the original

quality control tracking form is matched to the copy retained by the supervisor or

manager. The original form and supporting documents regarding the complaint are

filed in the department’s complaint folder. Each department maintains its own internal

complaint register and corresponding complaint files.




                                             8
 Findings

The standards used may be found in Appendix A immediately following the report. The

Company passed the following standards without comment:


Standard                                        Regulatory Authority
Complaint Handling Standard #1 – All            ORS 732.302(1) & ORS 746.230
complaints are recorded on the Company
complaint register.
Complaint Handling Standard #2 – The            ORS 732.302(1) & ORS 746.240
Company has adequate complaint handling
procedures in place and communicates such
procedures to policyholders.
Complaint Handling Standard #3 – The            ORS 731.296 and OAR 836-080-
Company furnished a response within 21          0225(2)
days of an inquiry from the Insurance
Commissioner.
Complaint Handling Standard #4 – The            OAR 836-080-0225(2)
Company responds to Insurance
Commissioner complaints adequately and
conclusively.


The Company’s complaint register for Insurance Division complaints received during

the examination period was used to develop the population reviewed for Standards 3

and 4. From a total population of 223 inquiries received from the Oregon Insurance

Division during the examination period, a random sample of 50 (22%) items was

selected for review. Summaries of the reasons for the complaints and their dispositions

are shown below:

Reason                                               Number      % To Total

Underwriting-Cancellation                                 3             6%
Claims-Delay in claim handling                            6            12
Claims-Denial of claim                                   19            38
Claims-Dissatisfaction with benefits paid                13            26
Claims-Dissatisfaction with claim investigation           3             6
Claims-Dissatisfaction with quality of car repair         1             2
Claims-General claims handling                            1             2
Policyholder-Premium rate increase                        3             6
Policyholder-Problem with billing                         1             2
Total                                                    50           100%




                                            9
 Disposition                            Number          % To Total

Corrective action taken                      8               16%
Satisfactory explanation given              16               32
No action taken-position upheld             26               52
Total                                       50              100%


Number of Days to Acknowledge          Number        % To Total

0-21                                        50              100%
22-45                                        0                0
Over 45                                      0                0
Total                                       50              100%


The Company’s complaint register for noninsurance division inquiries received during

the examination period was used to develop the population reviewed for Standards 5

and 6. From a total population of 187 inquiries received during the examination period,

a random sample of 50 (27%) items was selected for review. Summaries of the reasons

for the inquiries and their dispositions are shown below:

Reason                                             Number             % To Total

Underwriting-Cancellation                                    3               6%
Advertising-General dissatisfaction with agent               2               4
Claims-Delay in claim handling                               6              12
Claims-Denial of claim                                       2               4
Claims-Dissatisfaction with benefits paid                    9              18
Claims-Dissatisfaction with claim investigation              2               4
Claims-Miscellaneous                                         1               2
Policyholder-Agent change delay                              1               2
Policyholder-Agent delay in processing                       1               2
Policyholder-Home office processing delay                   19              38
Policyholder-Premium rate increase                           2               4
Policyholder-Rudeness/discourtesy                            2               4
Total                                                       50             100%

Disposition                                     Number           % To Total

Corrective action taken                            24                48%
Satisfactory explanation given                     10                20
No action taken-position upheld                    14                28
Unknown                                             2                 4
Total                                              50               100%




                                           10
 Exceptions to standards 5 and 6 are noted below:


Complaint Handling Standard #5 – The Company furnished a response within 30 days

of an inquiry from an insured. Reference: OAR 836-080-0225(3).


Findings: Passed with comment. 93% compliance to applicable files. Two files (7%)

failed this standard because the Company was unable to provide documentation

regarding its communication with the complainants. This standard did not apply to 20

of the files reviewed because the complaints were not made by insureds. Nineteen of

those complaints were made by agents and one was made by a repair shop.


Although the failure rate exceeds the established tolerable error ratio, due to the

reduced size of the applicable population, a recommendation is not warranted.


Number of Days to Acknowledge          Number        % To Total

0-30                                       28            93%
31-45                                       0             0
Over 45                                     0             0
Unknown                                     2             7
Total                                      30           100%


Complaint Handling Standard #6 – The Company response to an inquiry from an

insured is adequate and answers the questions being raised. Reference: OAR 836-080-

0225(3).


Findings: Passed with comment. 93% compliance to applicable files. Two files (7%)

failed this standard because the Company was unable to provide documentation

regarding its communication with the complainants. This standard did not apply to 20

of the files reviewed because the complaints were not made by insureds. Nineteen of

those complaints were made by agents and one was made by a repair shop.




                                          11
 Although the failure rate exceeds the established tolerable error ratio, due to the

reduced size of the applicable population, a recommendation is not warranted.


                           UNDERWRITING AND RATING

The Company uses a captive agent system to market its products.            Quotations are

prepared by the agency force in their field offices. Coverage is not considered bound

until money is collected. Agents may submit nonbound applications to underwriting for

consideration.


After selling a risk and binding coverage, agents enter the applicant’s information into

the Company’s APPS (Auto Policy Processing System) system.            The information is

subject to two separate program runs. The first program is “policy validation” which

reviews the policy for coverage, discounts, rates and product group validity. Agents are

notified if errors are found and are asked to make any corrections or provide missing

information.


The second system is the Underwriting Expert System. This system reviews the policy

for eligibility by analyzing selected underwriting factors and guidelines. If the expert

system can accept the policy, it is automatically issued without manual underwriting

intervention.    Declarations pages are mailed directly to the insured.       Neither the

Company nor the agent retain copies of the declarations page. The system will also

decline automatically if the factors warrant a declination.      Manual underwriting is

performed when the expert system cannot render a decision.


All new business policies are subject to various investigative reports. The first report is

a Farmers Auto Risk Assessment code (FARA).           It is ordered on the head of the

household, children 25 years old and over and other members of the household. If the

FARA is less than 700, the APPS system will order a motor vehicles report (MVR).


                                            12
 MVRs are also ordered if a credit score is not found due to lack of a credit history. If

the FARAs exceed 700, no MVRs are ordered.


A loss history report is ordered concurrently with the FARA. Any losses reported on a

loss history report will automatically refer the policy to manual underwriting. If the

loss history report is clear, the system defers to the assist credit report to determine if

MVRs are warranted.


Prior to the renewal date of the policy, the APPS system will rerun the policy validation

and underwriting expert system. APPS will order new MVRs if certain conditions are

met, such as loss activity. If all coverage and underwriting guidelines are met, the

policy is renewed. Any new activity found on the MVR, ineligible coverage or ineligible

underwriting guidelines will cause the policy to be referred to underwriting for review.


The process of selling and renewing the policy is interfaced between this Company and

its affiliate, Mid-Century Insurance Company (Mid-Century). When a prospect requests

a quote, they may be placed in one of this Company’s rating tiers or in Mid-Century

depending on the underwriting criteria. The same household may be issued a mix of

policies with some vehicles issued under one of this Company’s tiers and other vehicles

issued in Mid-Century. Agents are allowed to make subjective decisions regarding the

placing of risks in a tier or Company.     Those decisions are subject to underwriting

review if the prospect does not meet the minimum qualification of the tier or Company.


At renewal, an insured may be moved to a better rated tier. This is usually at the

request of an agent or the insured themselves. Insureds may also be nonrenewed and

offered a policy in the higher rated Mid-Century.




                                            13
 Findings

The underwriting review consists of eighteen standards. A list of all standards appears

in Appendix A immediately following this report. Standards number 6 and 16 were

waived, as they did not pertain to personal lines automobile insurance, which was the

target of this examination. The Company provided population runs of business issued,

nonrenewed, and canceled from which random samples were drawn. The chart below

illustrates the size of the original population as well as the size of the sample drawn.


Population                   Total         Initial Random
Reviewed                   Population          Sample             % To Total

New business issued           41,340              100                0.24%
Policies nonrenewed            1,936               50                 2.6%
Policies canceled              4,557               50                 1.1%


The following standards were passed without comment:

Standard                                                   Regulatory Authority
Underwriting Standard #2 – Disclosures to insureds         ORS 737.205 and ORS
concerning rates and coverage are accurate and             742.566
timely.
Underwriting Standard #7 – The company                     ORS 746.015, ORS 746.018
underwriting practices are not unfairly discriminatory.    and OAR 836-081-0030
The company adheres to applicable statutes, rules and
regulations and company guidelines in the selection of
risk.
Underwriting Standard #11 – Underwriting, rating           ORS 746.240
and classifications are based on adequate information
developed at or near the inception of the coverage
rather than near expiration, or following a claim.
Underwriting Standard #13 – The Company does not           ORS 746.240
engage in collusive or anti-competitive underwriting
practices.


Standard 16 was waived. It applies solely to property policies which were not reviewed

during this examination.


The following exceptions were noted:




                                            14
 Underwriting Standard #1 – The rates charged for the policy coverage are in

accordance with filed rates (if applicable) or the company rating plan. Reference: ORS

737.205.


Findings: Passed with comment. Initial attempts to rate policies were unsuccessful due

to the lack of documentation (see Additional Findings and Procedures at the end of this

section). Eventually, 14 files were rated by hand but the examiner was unable to match

any rates. With the help of the Company, 13 of the 14 files were rated and matched to

the charged rate. Rating factors were reviewed on all files and no discrepancies were

noted.


Underwriting Standard #3 - An insured or applicant may not be assigned to a higher

risk category than the person would normally be assigned because the person allowed a

motor vehicle liability policy to lapse or had driving privileges suspended due to a

nondriving offense. Reference: ORS 742.449.


Findings: Passed with comment. 96% compliance.       The majority of reviewed policies

were in the highest rated tier within this Company. Most applicants with a lapse in

insurance are placed in the higher rated affiliated carrier, Mid-Century Insurance

Company. Four policies failed because the insurer placed coverage in a higher rate tier

due to lapse of prior insurance. It was not clear why an exception was made to place

them in this carrier vs. the affiliated carrier. The Company did not document if the

lapses were in violation of the financial responsibility laws. Furthermore, the Company

had not established (during the examination period) any procedures to distinguish

between applicants who had violated the financial responsibility laws and those that

had not. Under the guidelines in force at the time of the examination, it appears as if

any applicant with a lapse in insurance would be automatically assigned to a higher




                                          15
 rated tier (or Company) without first investigating and documenting the reason for the

lapse.


On August 2, 1999, the Company reprogrammed its system to refer all applicants that

have less than 12 months of prior liability insurance to underwriting for review and

proper placement.


Due to the Company’s corrections, a recommendation is waived.


Underwriting Standard #4 – Written rejection for higher limits of uninsured and

underinsured motorist coverage limits must be obtained. Reference: ORS 742.502(2)(a)

and OAR 836-054-0000.


Findings: Failed. 15% compliance. Seventy-nine files (85%) failed this standard. The

Company provided the examiners with an electronic file of 41,340 policies issued during

the examination period. A list of 107 (0.26%) policies with mismatched BI and UIM BI

limits was generated from that electronic file using ACL (Audit Command Language)

software.


The examiner asked the Company to furnish copies of the waivers signed by the

policyholders at the time the coverage was written. The Company identified one case

that was not written in Oregon. The standard did not apply to thirteen of the files

because the coverage was out of force at the time the records were transferred to

Oregon. These cases appeared on the original listing because they were attached to

household records that came to Oregon with other coverage in force. This reduced the

population of applicable files to 93.




                                          16
 Number of Failures       Reason

            54           Company was unable to provide copies of the signed
                         waivers

            23           Waivers signed by the applicants do not meet the
                         requirements of OAR 836-054-0000(2)

             2           Signed waivers are incomplete
            79           Total


I recommend the Company maintain documentation of written rejection for

higher limits of uninsured and underinsured motorist coverage in accordance

with the provisions of ORS 742.502(2)(a) and OAR 836-054-0000.


The Company has instructed all agents to destroy the outdated forms and use only the

corrected forms.   The Company has also established an internal audit procedure to

ensure compliance.


Underwriting Standard #5 – Named exclusions are signed by all named insureds and

comply with all rules and regulations. Reference: ORS 742.450(5).


Findings:    Passed with comment.     The issued files reviewed did not contain any

examples of files in which a named exclusion was used. The procedures appear to be in

place to obtain the appropriate signatures.


Underwriting Standard #6- Individual Risk Package Modifiers (IRPM) are used in

accordance with the instructions from the Oregon Insurance Division.          Reference:

Bulletin 82-4.


Findings: Waived. Not applicable to this population.




                                              17
 Underwriting Standard #8 – Employment driving record may not be used to determine

if the file is issued or renewed or in the calculation of rates. Reference: ORS 746.260

and ORS 746.265(1).


Findings: Passed with comment. The Company produced documents from its vendor

showing the Company is following state statute relating to the use of employment

driving records.


Underwriting Standard #9 – For the purpose of determining whether or not to issue or

renew a policy and the calculation of rates an insurer may not use a driving record older

than three years immediately preceding the issuance or renewal. Reference:          ORS

746.265(2).


Findings: Passed with comment. 100% compliance.


The electronic underwriting system interfaces with the MVRs and loss history reports

and the driving record appears on the APPS “UW” screen.


The examiner did encounter a computer generated agent advisory used to communicate

underwriting decisions that references a five-year driving record.        The Company

indicated it was a generic form used in other states including those that allow a five-

year driving history. A recommendation is not warranted at this time.


Underwriting Standard #10 – All forms and endorsements forming a part of the

contract are listed on the declarations page and should be filed with the department of

insurance. Reference: ORS 742.003.


Findings: Failed. 0% compliance. All files were deemed to have failed this standard

due to lack of documentation. The Company maintains its records on two systems, the


                                           18
 APPS system and the Network system. Neither the APPS system nor the Network

system contains the form numbers that were issued with original policy. The Company

and its agents do not maintain copies of the declaration pages, so the form numbers

could not be determined from paper copies.


I recommend the Company’s records accurately document all forms used with

policies at the time of issuance in order to determine if the forms were filed

and approved at the time of use in compliance with ORS 742.003.


The Company is implementing new technology in mid-2000 which it believes will

address this issue.


Underwriting Standard #12 – File documentation adequately supports decisions made.

Reference: ORS 733.170.


Findings: Failed. 0% compliance. The Company’s current system does not support the

documentation of underwriting decisions. The Company explained that many decisions

are made verbally over the phone with the agent and are, therefore, not supported. The

Company did, at one time, use the remarks section of the system for documentation.

This would produce a referral to underwriting, so the practice was discontinued. Many

of the decisions to cancel/rewrite policyholders from one policy to another were not

documented and we were unable to determine why insureds were moved from one

company or plan to the next.


I recommend the Company’s documentation adequately support all decisions

made by the underwriters and underwriting decisions made by agents in

accordance with ORS 733.170.


Agents and underwriters are receiving additional instructions in documenting files.


                                             19
    Underwriting Standard #14 – Rejections and declinations are not unfairly

discriminatory. Reference: ORS 746.015, ORS 746.018 and OAR 836-081-0030.


Findings: Failed. 80% compliance. Ten files (20%) failed this standard. The reasons

are shown in the chart below:


Number of Failures        Reason

            2             Company unable to locate documentation

            4             Lapse in coverage with no documentation to show
                          Company confirmed applicant was in violation of
                          financial responsibility law

            2             Company unable to provide reason for cancellation

            1             Company documentation does not include MVR
                          information used in underwriting decision

            1             Company canceled coverage due to suspended license but
                          did not attempt to learn the reason for suspension prior
                          to cancellation
           10             Total


The Company indicated it is amending how it addresses suspended licenses to confirm

they are the result of a driving-related offense.


I     recommend     the    Company       maintain   documentation      regarding     its

underwriting decisions to sufficiently demonstrate its underwriting practices

are not unfairly discriminatory in accordance with ORS 746.015, ORS 746.018,

and OAR 836-081-0030.


The Company has reminded underwriters to document all decisions.


Recommendations regarding adverse underwriting action relating to suspended licenses

and violation of the financial responsibility law appear under Standard 3 above.




                                             20
 Underwriting Standard #15 – Cancellation/nonrenewal notices comply with policy

provisions and state laws and company guidelines. Cancellation must be made within

the first 60 days of the policy except for the exemptions provided by law. Nonrenewal

and changes in the policy must be sent at least 30 days in advance of the renewal date.

Reference: ORS 742.566 through ORS 742.572 and ORS 746.650.


Findings: Failed. 52% compliance. Forty-eight files (48%) failed this standard.


Population                Number        Number Passed        Number Failed
Reviewed                   Files          Standard             Standard

Canceled policies             50                23                    27
Nonrenewed policies           50                29                    21
Total                        100                52                    48


The failures were for the following reasons:

                                               Canceled    Nonrenewed
Reason                                         Policies      Policies         Total

Cancellation notice did not contain               25             N/A              25
specific reason for cancellation

Company unable to provide copy of                    2            1                3
cancellation or nonrenewal notice

Nonrenewal notice did not contain                N/A             16               16
specific reason for adverse underwriting
action

Nonrenewal notice did not contain                N/A              3                3
specific reason for adverse underwriting
action and notice was not mailed 30
days prior to the date coverage ended

Nonrenewal notice was not mailed 30              N/A              1               1
days prior to the date coverage ended

Total                                             27             21               48


The Company indicated it has discussed the issue of providing the insured with the

specific reason for nonrenewal with its underwriters. The Company plans to regularly


                                           21
 examine a representative sampling of these notices to verify the explanations more

clearly provide the reason(s) for the Company’s action.


I recommend the Company provide the applicant or policyholder with the

specific reason for an adverse underwriting decision in accordance with the

provisions of ORS 746.650.


The Company is implementing procedures to supply a specific reason in the event of an

adverse underwriting decision.


I recommend the Company provide the insured at least 30 days advance

notice of nonrenewal and include the specific reason for nonrenewal in

accordance with the provisions of ORS 742.566.


The Company is providing additional training to underwriters to address this issue.


Underwriting Standard #17 – The insurer reports the name, address and vin number of

each vehicle covered by a motor vehicle liability policy whether the policy was bought,

canceled or not renewed within 30 days of cancellation or nonrenewal and within 15

days of issuance to the Department of Transportation. Reference: ORS 742.580.


Findings: Passed with comment. The Company transmits the required information to

the Department of Transportation electronically and has not developed a system

program to print the reports. The transmissions are sent each Friday.


From the information provided, it appears the procedures the Company has established

are in compliance with this standard.




                                           22
 Underwriting    Standard     #18   –   Rescissions   are   not   made   for   nonmaterial

misrepresentations in accordance with the Company’s established procedures.

Reference: ORS 746.240.


Findings:   Passed with comment.         The Company indicated it did not have any

rescissions during the examination. Any rescission would be reviewed by underwriting.

The Company’s procedures indicate that only material misrepresentations would be

used if considering a rescission.


Additional Findings and Procedures

Neither the Company nor its agents maintain declarations page showing the rates

charged at the time of issuance and the form numbers that make up the policy.

Initially, the examiners could not obtain adequate rating information from the

computer screens available. The Company offered to provide reports called the “Reports

of Final Issued Policy.” The examiners were informed these reports would have all the

information necessary to rate the policies. The reports were ordered from programmers

in the Corporate offices. When the reports arrived, the examiners could not match any

rates with the information provided. There were two premiums shown on each report

and the Company provided different information three separate times regarding which

of the two premiums printed on the declarations pages. The Company also wavered on

the issue of whether or not the membership fee was included in the final premium.


When we could not match any premiums, the examiners left the files with the Company

and asked them to demonstrate how they were rated. The Corporate office could not

provide anyone who could manually rate policy files.        With the help of a customer

service representative in the Portland, Oregon offices, we were able to rate 13 of the 14

policies. One policy could not be reconciled.


                                                23
 The customer service representative could not rate all the files from the reports we

received. In two cases, the coverages were not shown on the reports and had to be

recreated from either microfiche or computer screens. In two additional cases, some of

the discounts were missing from the reports and had to be researched through other

sources.


Although we were eventually able to determine that in most cases the filed rates are

being used, the method of documenting policy rate information does not meet the

standard of “readily verifiable.”


I recommend the Company maintain its policy rating documentation and rate

pages in such a manner that the rates for each policy can be easily and readily

verified as filed rates in accordance with ORS 733.170.


Farmers reexamined their procedures for determining and obtaining policy rate

information.     As a result, to improve efficiency for such policy rate information,

individuals were retrained on procedures and how to obtain pertinent information.


                                         CLAIMS

Claims are reported to either the agent, the claims office or the after hours call center.

Each of these three locations has the responsibility of entering the claim report into the

Company’s computerized claim system.


If the claim has been reported to the agent or the after hours call center, a loss report is

generated from the computer system and sent to the appropriate claims office. The

office verifies coverage and assigns the claim to a claims representative (CR) for

investigation.




                                            24
 The CR makes contact directly with the claimant, obtains the necessary documents

and inspects the vehicle, if required. Reserves are set if it is an injury claim. The CR

opens subrogation if it is applicable. Individual reserve amounts are revised from time

to time to reflect the current value of the claim. Any initial reserve or reserve change

over the branch claim manager’s (BCM) authority must be accompanied by a regional

office file including an adjusters investigation report and summary.


The CR is not required to set reserves for material damage or property damage claims.

An actuary calculates reserves for these losses.


Once the investigation is complete, the CR pays the claim and the reserve is closed.


All denial letters are signed by the BCM. Coverage may not be denied on any bodily

injury, uninsured motorist, medical payment or other injury claim without prior

approval of the regional claims manager/commercial zone director. Denial of a defense

requires home office approval.


Claims involving unusual or complicated situations or large exposure may be submitted

to   the    regional   claims   manager/commercial   zone   director   with   the   BCM’s

recommendation. These cases may also be referred to the home office claims staff for a

decision.


The Company maintains a claims manual outlining in detail its claim procedures.


Findings

The Company provided lists of claims paid and total loss claims paid during the

examination period. From these lists, random samples were selected for review.


The Company was unable to produce a list of denied claims that excluded those which

were simply closed without payment. An alternative method was used to select the

                                            25
 denied claims for review. The examiner went to the Company’s off-site records storage

facility with two Company employees to pull the initial sample of denied claims from the

shelves. Of the 50 denied claims reviewed the reasons were denial were as follows:


Reason For Denial                                    Number           % To Total

Farmers insured driver not at fault                     44                88%
No coverage in force                                     4                 8
Car not covered under policy                             1                 2
Insured says he was not involved in accident             1                 2
Total                                                   50               100%


The resulting populations and samples drawn are shown below.


                             Total          Initial Random
Type of Claim              Population           Sample               % To Total
Claims paid                  33,888                100                  .30%
Total loss claims paid        3,435                50                  1.46%
Denied claims               Unknown                50                 Unknown


The total loss claims were reviewed for compliance with standards 5 and 17 only.


Claims for which the Company was unable to provide files were deemed to fail the

standard.


The standards used may be found in Appendix A immediately following the report. The

Company passed the following standards without comment:


Standard                                         Regulatory Authority
Claims Standard #3 – Claims are resolved         OAR 836-080-0235(1) and (4)
in 30 days unless a delay letter (45 days)
has been sent.
Claims Standard #6- Claims are not denied        ORS 746.230(1)(c) and (d)
without first conducting a reasonable
investigation.

Claims Standard #10 – The Company did            ORS 746.230(1)(i)
not attempt to settle a claim on the basis of
an altered application without notice to or
consent of the applicant.
Claims Standard #11 – The Company did            ORS 746.230(1)(k)

                                            26
not delay investigation or payment of
claims by requiring a claimant to submit a
preliminary claims report and then
requiring subsequent submission of loss
forms when both require essentially the
same information.
Claims Standard #13 – Claim files are          ORS 746.240
reserved in accordance with the Company’s
established procedures.
Claims Standard #14 – Denied and closed-       ORS 746.230(1)(m) and OAR 836-080-
without-payment claims are handled in          0235(1)
accordance with policy provisions and state
law.
Claims Standard #18 – Automobile claims        OAR 836-080-0240(2), (3), (5), (6), (7),
are properly handled in accordance with        and (8) and ORS 746.230(1)(i)
policy provisions and applicable statutes,
rules and regulations.


Claims Standard 16 refers to the Company’s processing of personal injury claims.      This

standard was waived. The sample of claims did not contain enough personal injury

claims to determine if the Company’s practices were in compliance and a separate

sample was not drawn.


Claims Standard #1 – The initial contact by the Company with the claimant is within

30 days. Reference: OAR 836-080-0225.

Days to Acknowledge             Number          % To Total

0 – 30                            146               97.3%
31- 45                              2                1.3
Over 45                             1                 .7
Unknown                             1                 .7
Total                             150              100.0%


Findings: Passed with comment. 97% compliance. Four paid claim files (3%) failed this

standard.



Three of the claims were not acknowledged within 30 days. The information could not

be determined in the remaining file.


                                          27
 Population               Number      Number Passed     Number Failed
 Reviewed                  Units        Standard          Standard

Claims paid                100               96               4
Claims denied               50               50               0
Total                      150              146               4


A failure rate of 3% does not represent a pattern. Therefore, no recommendation is

warranted.


Claims Standard #2 - Investigations are conducted within 45 days. Reference: OAR

836-080-0230.


Findings: Passed with comment. 99% compliance. One paid claim file (1%) failed this

standard.


One case was not handled properly.      Once reassigned to a new CR, the claim was

processed; however, this was 119 days after receipt.


Population              Number      Number Passed      Number Failed
Reviewed                 Units        Standard           Standard

Claims paid              100                99               1
Claims denied             50                50               0
Total                    150               149               1


A failure rate of 1% does not represent a pattern. Therefore, no recommendation is

warranted.


Claims Standard #4 – The Company responds to claim correspondence in 30 days.

Reference: OAR 836-080-0225 All Subparts.



Findings: Passed with comment. 95% compliance to applicable files. One file (5%)

failed this standard.


                                           28
 An attorney wrote to the Company asking for the denial of benefits to be reconsidered.

That claim file does not indicate the Company responded to the attorney’s request.


                                    Number Not         Number        Number
Population           Number         Applicable         Passed         Failed
Reviewed              Units           (N/A)           Standard       Standard

Claims paid             100               87               13            0
Claims denied            50               43                6            1
Subtotal                150              130               19            1
Less N/A files          130
Total                    20              130               19            1


The relatively small number of applicable files in combination with the compliance rate

of 95% does not warrant a recommendation.


Claims Standard #5- Claim files are adequately documented. Reference: OAR 836-080-

0215 and ORS 733.170.


Findings: Passed with comment. 95% compliance. Nine files (5%) failed this standard.


One paid claim did not contain all the documents necessary to reconstruct the claims.

One denied claim did not contain documentation to indicate the claims representative

followed up with a police officer regarding the case as requested in a letter received from

an attorney.


Five total loss claims failed for the following reasons:




Number of Files       Reason

         3            No documentation in claim file to support actual cash value (ACV)
                      established through use of comparable vehicles. The files do not

                                               29
                      indicate the CR contacted the owners of the comparables found in
                      order to learn if the loss vehicle and the comparables were
                      similarly equipped or in the same condition.

                      Normally, the Company uses a service to determine the ACV of a
                      total figure. Due to the type or age of the three vehicles mentioned
                      above, the adjuster did independent evaluation.

         1            File documentation does not support condition adjustments made
                      to ACV (either additional amounts allowed or subtracted from
                      ACV).

         1            File documentation does not explain reason for delay in
                      acknowledging claim and Company was unable to locate the BCO
                      (branch claim office) claim file that may have contained this
                      explanation.


Population             Number         Number Passed       Number Failed
Reviewed                Units           Standard            Standard

Claims paid               100                   99                1
Claims denied              50                   49                1
Total loss claims          50                   43                7
Total                     200                  191                9


The overall claims documentation rate falls within a tolerable error rate. However, the

majority of errors were discovered in the total loss files. See Claims Standard 17.


Claims Standard #7 – The Company promptly and in good faith equitably settles claims

in which liability has become reasonably clear. Reference: ORS 746.230(1)(f), (L), and

(h).


Findings: Passed with comment. 97% compliance. Three paid claim files (3%) failed

this standard. One case took 55 days to close after the proof of loss had been received.

It appears this was due to a clerical error.




A car rental bill was received May 27, 1998, and not paid until November 6, 1998. This

bill was presented to the Company for payment at least three times during that period.

                                               30
 The Company acknowledged this claim was not paid promptly but did comment that

the delay did not affect the customer.


The other case was not handled properly. Once reassigned to a new CR, the claim was

processed; however, this was 119 days after receipt.


Population          Number         Number Passed        Number Failed
Reviewed             Units           Standard             Standard

Claims paid            100                97                  3


Claims Standard #8 – The Company did not misrepresent the facts or policy provisions

while settling a claim. Reference: ORS 746.230(1)(a).


Findings: Passed with comment. 95% compliance. Eight paid claim files (5%) failed

this standard. Seven of the files did not demonstrate the Company explained the

applicable coverages to the claimant.


The other claim was made by a health insurance company for reimbursement of medical

benefits due to an automobile related injury. The Company paid the health insurer for

the amount it had paid toward the medical expenses, but did not consider the difference

between the total amount billed and amount paid when processing the claim.          No

attempt was made to determine if the insured was responsible for the remaining

amount or if the provider waived the unpaid balance. This investigation would have

been necessary in order to determine whether all expenses incurred were paid in

accordance with the Company’s contract (all reasonable and necessary medical

expenses).


Population           Number         Number Passed       Number Failed
Reviewed              Units           Standard            Standard

Claims paid             100                 92                 8
Claims denied            50                 50                 0

                                           31
 Total                   150                 142                   8


Claims Standard #9 – Claim handling practices do not compel claimants to institute

litigation, in cases of clear liability and coverage, to recover amounts due under policies

by offering substantially less than is due under the policy. Reference: ORS

746.230(1)(g).


Findings: Passed with comment. In the applicable files reviewed, the examiner did not

note instances in which claimants were compelled to institute litigation. 4,966 bodily

injury claims were paid during the examination period.         Of these, 704 (14%) were

litigated claims.   Based on the files reviewed and the information provided by the

Company, it appears the Company has passed this standard.


Claims Standard #12 – The Company uses the reservation of rights and excess of loss

letters in accordance with the Company’s established procedures.           Reference:   ORS

746.240.


Findings: Passed with comment. 100% compliance to applicable files. In addition to

the files referenced below, the examiner reviewed the Company’s established procedures

for use of reservation of rights and excess of loss letters. These procedures do appear to

be in compliance with this standard.

                                 Number Not         Number         Number
Population           Number      Applicable         Passed          Failed
Reviewed              Units        (N/A)           Standard       Standard

Claims paid            100             100              0              0
Claims denied           50              48              2              0
Subtotal               150             148              2              0
Less N/A files         148
Total                    2             148              2              0

Note: The N/A files are those which did not require either a reservation of rights or

excess of loss letter according to the Company’s established procedures.


                                             32
 Claims Standard #15 – Canceled benefit checks and drafts reflect appropriate claim

handling practices. Reference: ORS 746.240.


Findings: Passed with comment. The examiner visited the mailroom of a BCO where

ten claim payments were selected for review. The examiner compared the date of the

check to the mail date. Nine of the ten checks contained the same date as the mail

date. One check was dated one week prior to the date of the examiner’s visit. The

Company explained that it had been inadvertently mailed without postage and was

returned by the post office. That check was received back in the BCO the day before the

examiner’s visit. This appeared to be a reasonable explanation for this delay.


Claims Standard #17 – Total loss settlements are handled in accordance with policy

provisions and applicable statutes, rules and regulations. Reference: OAR 836-080-

0240(1).


Findings: Failed. 70% compliance. Fifteen files (30%) failed this standard.


Five claimants received additional compensation during the examination period because

the total loss vehicles’ equipment was not correctly considered at the time the ACV was

established. The Company paid a total of $1,060.00.


The Company also paid an additional $277.00 to a claimant during the examination

period because the condition of the vehicle was not properly represented at the time the

ACV was determined.




A travel trailer was totaled in an accident. The Company used comparable local trailers

to establish the ACV. The amount offered by the Company was less than the lowest


                                           33
 amount of the comparables located and more than 20% less than the average cost of

the comparables. The file does not explain why the loss trailer was worth so much less

than the comparables used to set the ACV. It appears a correct ACV may not have been

used for this claim.


It appears a car rated in above average condition was not given a correct ACV. The

comparables used by the Company were older models with higher values than the

amount offered for the loss vehicle. The file does not explain why this car was worth

less than the comparables located and the Company acknowledged the file

documentation is not what it would have required or expected.


The Company used local comparable vehicles to determine the ACV of a total loss. The

file contains photocopies of the newspaper advertisements used, but does not indicate

the Company inspected those cars or contacted the owners to learn if they were

similarly equipped or in the same condition with mileage comparable to the loss vehicle.


Another insured was offered an ACV based on two comparables that were hardship

sales. The insured provided the Company with a list of seven comparable cars available

at local dealerships. The file does not indicate the Company considered this additional

information supplied by the insured in order to settle the claim. The insured rejected

the initial offers made by the Company.          The loss occurred February 4, 1998, the

insured provided data on the other comparable vehicles February 17, 1998, and the

Company did not settle the claim until July of 1998. Payment could not be made until

November of 1998 due to difficulties with the title.




In some cases, the Company uses an outside vendor to determine the ACV on loss

vehicles. The loss vehicle is compared to dealer-ready condition vehicles and the ACV is


                                            34
 adjusted to allow for the amount it would require to bring the loss vehicle up to dealer-

ready standards.


The vendor provides the Company with specific instructions on how to rate a vehicle’s

condition. In order to maintain consistency in establishing ACVs, the Company must

uniformly follow the vendor’s instructions for each loss reported. This is important for

the fair and equitable treatment of policyholders.


One file failed because it appears the Company did not follow the ACV vendor’s

instructions for reporting the condition of the vehicle. The body/glass was rated average

with a file note of unrepaired prior damage to the hood. Instead of rating the body/glass

below average, the Company told the vendor this was in average condition and then

deducted $120.00 from the ACV amount set by the vendor.


Another case was rated average, but the file documentation does not explain the reason

for this rating. The ACV is reduced if the vehicle is rated average. The Company

explained this rating was based on the CRs physical inspection of the loss vehicle and

indicated the car had extremely high mileage. The vendor makes a separate deduction

based on mileage. It appears the condition of this vehicle may not have been properly

represented to the vendor establishing the ACV.


One file failed because the vehicle was not correctly represented to the vendor when the

initial ACV was set. Several errors were made by the CR processing the claim. The

Company omitted options on the vehicle and failed to note the supercharged engine

when reporting facts regarding the car to the vendor used to establish ACV.            An

incorrect deductible was used. The insured rejected the initial offer. The Company

eventually paid more than $3000.00 above the initial offer on this claim. This was a

1997 model that was totaled just six months after the insured bought the car.


                                           35
 An unrecovered stolen vehicle was rated average by the Company when reporting the

vehicle condition to the ACV vendor. $418.00 was deducted due to the condition of the

vehicle that was not even seen by the Company. The Company indicated its policy is

that without seeing the vehicle and without support, they rate the vehicle as average.

The insured completed a proof of loss form stating there was no prior damage to the

vehicle. The file did not contain information regarding when the initial ACV offer to the

insured was made or how much was offered. The Company added $550.00 to the ACV

set by the vendor without explaining what this amount represents.


A new 1998 model car was totaled.        The Company rated this car average.         The

information sent to the ACV vendor indicated the condition was OK in all categories

except tires which the Company listed as new. The CR recorded the condition in the

Company’s file documentation as new in all categories. This was a new car that had not

yet been issued license plates. The ACV vendor deducted $458.00 from the ACV due to

the condition of the vehicle. The Company informed the examiner that the ACV vendor

instructed them verbally to rate new cars as average. The Company has no written

documentation to support this procedure. It appears this new car should not have been

rated average according to the written condition rating guidelines provided by the ACV

vendor.


Population             Number       Number Passed        Number Failed
Reviewed                Units         Standard             Standard

Total loss claims        50                 35                  15




Disposition                           Number         % To Total

First offer accepted                     39               78%

                                           36
 Negotiated ACV with claimant                  10        20
 Appraisal process used                         1         2
Total                                         50       100%


Additionally, all but two of the errors noted under the standard measuring claims

documentation were total loss files.


I recommend the Company process total loss settlements in accordance with

policy provisions and applicable rules and regulations pursuant to OAR 836-

080-0240(1).


The Company indicated it has provided additional information and procedures to claims

personnel and has instructed management to perform routine quality assurance

reviews.


Claims Standard #19 – Deductible reimbursement to insureds upon subrogation

recovery is made in a timely and accurate manner. Reference: OAR 836-080-0240(4).


Findings: Passed with comment. 100% compliance to applicable files. In addition to

the file referenced below, the examiner reviewed the Company’s established subrogation

procedures. These procedures do appear to be in compliance with this standard.

                                  Number Not        Number        Number
Population           Number       Applicable         Passed        Failed
Reviewed              Units         (N/A)           Standard     Standard
Claims paid            100           99                 1            0
Less N/A files          99
Total                    1               99            1              0

Note: The N/A files are those claim files reviewed which did not involve subrogation

recovery of the claimant’s deductible.


Additional Findings

The Company paid $100.80 to a claimant during the examination period because an

error was made in calculating the betterment deduction on this paid claim.

                                               37
 The Company paid $50.00 to a claimant during the examination period for a case

reviewed in the paid claims sample that was a total loss.         The Company failed to

consider all of the optional equipment on the loss vehicle at the time the ACV was

established.


It appears there may be a training deficiency for CRs who assign the condition rating of

tires on total loss vehicles.


The examiner reviewed 20 of the total loss files to evaluate the consistency of rating tire

condition.     From the information reviewed, it appears the Company assigned tire

ratings on an inconsistent basis. 45% of the assigned ratings do not appear to comply

with the Company’s guidelines. If the reasons for the lower ratings were due to uneven

tread wear, the files should have been documented to reflect that fact.


A recommendation regarding proper handling of total loss claims appears under Claims

Standard #17.


      COMPLIANCE WITH PRIOR EXAMINATION RECOMMENDATIONS

A market conduct examination was conducted as of March 31, 1995. That examination

report yielded 21 recommendations. The four recommendations relating to homeowner

insurance and advertising were not reviewed by the examiner since these areas were

beyond the scope of this examination.


Three recommendations from the prior report appear unresolved as of this examination.

They appear below:


I recommend all records related to new auto business be kept in such a manner that the
director may readily verify the Company has given proper treatment to policyholders
and has complied with the Insurance Code pursuant to ORS 732.245 and ORS 733.170.




                                            38
 I recommend the Company provide all applicants, policyholders or individuals proposed
 for coverage with the specific reason or reasons for any adverse underwriting decisions
or advise the person that upon written request the person may receive the specific
reason or reasons in writing pursuant to ORS 746.650.

I recommend all records related to auto cancellations and declinations be kept in such a
manner that the director may readily verify the Company has given proper treatment to
policyholders and has complied with the Insurance Code pursuant to ORS 732.245 and
ORS 733.170.


                                    CONCLUSION


      Recommendation                                                            Page

1     I recommend the Company maintain documentation of written                   17
      rejection for higher limits of uninsured and underinsured motorist
      coverage in accordance with the provisions of ORS 742.502(2)(a) and
      OAR 836-054-0000.

2     I recommend the Company’s records accurately document all forms             19
      used with policies at the time of issuance in order to determine if the
      forms were filed and approved at the time of use in compliance with
      ORS 742.003.

3     I recommend the Company’s documentation adequately support all              19
      decisions made by the underwriters and underwriting decisions made
      by agents in accordance with ORS 733.170.

4     I recommend the Company maintain documentation regarding its                20
      underwriting decisions to sufficiently demonstrate its underwriting
      practices are not unfairly discriminatory in accordance with ORS
      746.015, ORS 746.018, and OAR 836-081-0030.

5     I recommend the Company provide the applicant or policyholder with          22
      the specific reason for an adverse underwriting decision in accordance
      with the provisions of ORS 746.650.




      Recommendation                                                            Page

6     I recommend the Company provide the insured at least 30 days                22
      advance notice of nonrenewal and include the specific reason for non-
      renewal in accordance with the provisions of ORS 742.566.


                                            39
7    I recommend the Company maintain its policy rating documentation        24
     and rate pages in such a manner that the rates for each policy can be
     easily and readily verified as filed rates in accordance with ORS
     733.170.

8   I recommend the Company process total loss settlements in                37
    accordance with policy provisions and applicable rules and regulations
    pursuant to OAR 836-080-0240(1).




                                        40
MANAGEMENT AFFIRMATION




          41
                                 ACKNOWLEDGMENT


The cooperation and assistance rendered by the officers and employees of the Company

during this examination is hereby acknowledged and appreciated.


A special thanks is extended to the examination coordinator for his courtesy, assistance,

and promptness in providing, correlating, or coordinating all requested documents and

statistics necessary to ensure a smooth transition during the overall examination

process. The responsibilities that were undertaken during this examination were in

addition to the scope of his regular assigned duties.


In addition to the undersigned, Gayle L. Woods, AIE, and Kathleen Kalk, insurance

examiners for the State of Oregon, Department of Consumer and Business Services,

Insurance Division, participated in this examination.


Respectfully submitted,



_______________________
Jann Goodpaster, CIE, CPCU
Chief Market Conduct Examiner
Market Conduct Section
Insurance Division
Department of Consumer and Business Services
State of Oregon




                                            42
                                    AFFIDAVIT




STATE OF OREGON            }
                           }   ss
County of Marion           }



Jann Goodpaster, being duly sworn, deposes and says that the foregoing market

conduct report of examination as of June 30, 1998, of Farmers Insurance Company of

Oregon, Tigard, Oregon, subscribed by her is true to the best of her knowledge and

belief.



____________________________
Jann Goodpaster, CIE, CPCU
Chief Market Conduct Examiner
Market Conduct Section
Insurance Division
Department of Consumer and Business Services
State of Oregon



Subscribed and sworn to before me on the _______ day of __________________, 2000.


__________________________________
Notary Public for the State of Oregon
My commission expires: March 22, 2001




                                         43
                                           APPENDIX A

                                   STANDARDS
                      FARMERS INSURANCE COMPANY OF OREGON
                          MARKET CONDUCT EXAMINATION


      Complaints

1   All complaints are recorded on the Company complaint             ORS 732.302(1), ORS 746.240
    register.
2   The Company has adequate complaint handling procedures           ORS 732.302(1), ORS 746.240
    in place and communicates such procedures to policyholders.
3   The Company furnished a response within 21 days of an            ORS 731.296, OAR 836-080-
    inquiry from the Insurance Commissioner.                         0225(2)
4   The Company responds to Insurance Commissioner                   OAR 836-080-0225(2)
    complaints adequately and conclusively.
5   The Company furnished a response within 30 days of an            OAR 836-080-0225(3)
    inquiry from an insured.
6   The Company response to an inquiry from an insured is            OAR 836-080-0225(3)
    adequate and answers the questions being raised.


      Underwriting and Rating

1   The rates charged for the policy coverage are in accordance      ORS 737.205
    with filed rates (if applicable) or the company rating plan.
2   Disclosures to insureds concerning rates and coverage are        ORS 737.205 and ORS 742.566
    accurate and timely.
3   An insured or applicant may not be assigned to a higher risk     ORS 742.449
    category than the person would normally be assigned
    because the person allowed a motor vehicle liability policy to
    lapse or had driving privileges suspended due to a non-
    driving offense.
4   Written rejection for higher limits of uninsured and             ORS 742.502(2)(a) and OAR
    underinsured motorist coverage limits must be obtained.          836-054-0000
5   Named exclusions are signed by all named insureds and            ORS 742.450(5)
    comply with all rules and regulations.
6   Individual Risk Package Modifiers (IRPM) are used in             Bulletin 82-4
    accordance with the instructions from the Oregon Insurance
    Division.
7   The company underwriting practices are not unfairly              ORS 746.015, ORS 746.018, and
    discriminatory. The company adheres to applicable statutes,      OAR 836-081-0030
    rules and regulations and company guidelines in the
    selection of risk.
8   Employment driving record may not be used to determine if        ORS 746.260 and ORS
    the file is issued or renewed or in calculation of rates.        746.265(1)




                                                 44
9    For the purpose of determining whether or not to issue or        ORS 746.265(2)
     renew a policy and the calculation of rates an insurer may
     not use a driving record older than three years immediately
     preceding the issuance or renewal.
10   All forms and endorsements forming a part of the contract        ORS 742.003
     are listed on the declarations page and should be filed with
     the department of insurance.
11   Underwriting, rating and classifications are based on            ORS 746.240
     adequate information developed at or near the inception of
     the coverage rather than near expiration, or following a
     claim.
12   File documentation adequately supports decisions made.           ORS 733.170
13   The company does not engage in collusive or anti-competitive     ORS 746.240
     underwriting practices.
14   Rejections and declinations are not unfairly discriminatory.     ORS 746.015, ORS 746.018 and
                                                                      OAR 836-081-0030
15   Cancellation/nonrenewal notices comply with policy               ORS 742.566 through ORS
     provisions and state laws and company guidelines.                742.572 and ORS 746.650
     Cancellation must be made within the first 60 days of the
     policy except for the exemption. Nonrenewal and changes in
     policy must be sent at least 30 days in advance of the
     renewal date.
16   Cancellation/nonrenewal notices comply with policy               ORS 742.224
     provisions and state laws, including the amount of advance
     notice provided to the insured and other parties to the
     contract.
17   The insurer reports the name, address, and VIN number of         ORS 742.580
     each vehicle covered by a motor vehicle liability policy
     whether the policy was bought, canceled, or not renewed
     within 30 days of cancellation or nonrenewal and within 15
     days of issuance to the Department of Transportation.
18   Rescissions are not made for nonmaterial misrepresentations      ORS 746.240
     in accordance with the Company’s established procedures.


      Claims

1    The initial contact by the Company with the claimant is          OAR 836-080-0225
     within 30 days.
2    Investigations are conducted within 45 days.                     OAR 836-080-0230
3    Claims are resolved in 30 days unless a delay letter (45 days)   OAR 836-080-0235(1) and (4)
     has been sent.
4    The Company responds to claim correspondence in 30 days.         OAR 836-080-0225 All Subparts
5    Claim files are adequately documented.                           OAR 836-080-0215, ORS
                                                                      733.170
6    Claims are not denied without first conducting a reasonable      ORS 746.230(1)(c) and (d)
     investigation.
7    The Company promptly and in good faith equitably settles         ORS 746.230(1)(f), (L) and (h)
     claims in which liability has become reasonably clear.



                                                  45
8    The Company did not misrepresent the facts or policy               ORS 746.230(1)(a)
     provisions while settling a claim.
9    Claim handling practices do not compel claimants to institute      ORS 746.230(1)(g)
     litigation, in cases of clear liability and coverage, to recover
     amounts due under policies by offering substantially less
     than is due under the policy.
10   The Company did not attempt to settle a claim on the basis         ORS 746.230(1)(i)
     of an altered application without notice to or consent of the
     applicant.
11   The Company did not delay investigation or payment of              ORS 746.230(1)(k)
     claims by requiring a claimant to submit a preliminary
     claims report and then requiring subsequent submission of
     loss forms when both require essentially the same
     information.
12   The Company uses the reservation of rights and excess of           ORS 746.240
     loss letters in accordance with the Company’s established
     procedures.
13   Claim files are reserved in accordance with the Company’s          ORS 746.240
     established procedures.
14   Denied and closed-without-payment claims are handled in            OAR 836-080-0235(1), ORS
     accordance with policy provisions and state law.                   746.230(1)(m) and OAR 836-080-
                                                                        0235(1)
15   Canceled benefit checks and drafts reflect appropriate claim       ORS 746.240
     handling practices.
16   Personal Injury Protection claims are properly handled in          ORS 742.520 through ORS
     accordance with policy provisions and applicable statutes,         742.544
     rules and regulations.
17   Total loss settlements are handled in accordance with policy       OAR 836-080-0240(1)
     provisions and applicable statutes, rules and regulations.
18   Automobile claims are properly handled in accordance with          OAR 836-080-0240(2), (3), (5),
     policy provisions and applicable statutes, rules and               (6) (7) and (8) and ORS
     regulations.                                                       746.230(1)(i)
19   Deductible reimbursement to insureds upon subrogation              OAR 836-080-0240(4)
     recovery is made in a timely and accurate manner.




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