-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
arrangements.
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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