Minnesota Lawyers Mutual Insurance Company and Subsidiaries - Page 4

                  In the mid-1980’s, the department began examining                                    
            petitioner’s financial condition and criticized petitioner for                             
            its inadequate surplus, loss reserving practices, and reinsurance                          
                  Petitioner began to take a variety of steps to improve its                           
            financial condition.  In 1985, as part of its plan to improve its                          
            operations and reduce expenses, petitioner hired Timothy Gephart                           
            (Gephart) as vice president of claims.2  Under Gephart’s                                   
            direction, petitioner began the process of developing a claims                             
            procedure manual and eventually hired two additional employees in                          
            its claim department.  In late 1985 or early 1986, petitioner                              
            doubled from $7,500 to $15,000 its minimum reserve for each claim                          
            received.  In 1986, petitioner established a new bulk reserve for                          
            “adverse loss development”.3  In 1986, the department approved                             
            two premium increases for petitioner.                                                      
                  On March 24, 1986, the department’s commissioner ordered a                           
            special examination of petitioner and appointed a special                                  
            examiner to perform operations audits and underwriting                                     
            procedures.  In a May 14, 1986, report to the department’s                                 
            commissioner, the special examiner stated that even though                                 
            petitioner’s March 31, 1986, adjusted surplus was only $302,478,                           

                  2 Initially, petitioner had no claim department but instead                          
            relied on an outside law firm to manage its claims.                                        
                  3 As of Sept. 30, 1986, the adverse loss reserve had reached                         
            a level of $626,000.                                                                       

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Last modified: May 25, 2011