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The examiners reviewed files drawn from the category of Closed Claims for the period January 1, 2003 through November 1, 2004, commonly referred to as the "review period". The examiners reviewed 128 ACIC claims files. The examiners cited 82 claims handling violations of the Fair Claims Settlement Practices Regulations and/or California Insurance Code Section 790.03 within the scope of this report. Further details with respect to the files reviewed and alleged violations are provided in the following tables and summaries.

In addition to the claims closed during the window period, the examiners reviewed other claims that were filed on the same bond as those in the window period. The aggregate coverage limit under the Contractors License Bond applies to all claims filed against the bond. This affects the claims in the window period as the Surety may have gathered information on surrounding claims that relate to the claim within the window period. In addition, the examiners reviewed 10 files the Company considered "potential claims" that the Company had not included in the claims population.


The following is a brief summary of the criticisms that were developed during the course of this examination related to the violations alleged in this report. This report contains only alleged violations of Section 790.03 and Title 10, California Code of Regulations, Section 2695 et al. In response to each criticism, the Company is required to identify remedial or corrective action that has been or will be taken to correct the deficiency. Regardless of the remedial actions taken or proposed by the Company, it is the Company's obligation to ensure that compliance is achieved. Money recovered within the scope of this report was $15,726.37. An additional $188,118.67 in collateral was returned to principals.

1. The Company failed to pursue diligently an investigation of a claim or persisted in seeking unnecessary information not reasonably required for or material to resolution of a claim dispute. In 29 instances, the Company failed to pursue diligently an investigation of a claim or persisted in seeking unnecessary information not reasonably required for or material to resolution of a claim dispute. In 21 instances the Company failed to investigate to determine if the claimant was damaged by a violation of the Contactor's License Law. The Company did not direct industry experts to inspect the construction site, contact the pertinent parties involved, or direct pertinent questions to all parties. The Company limited their investigation to reviewing documentation submitted by the parties involved and then informed the claimant the documentation was not sufficient to perfect the claim. If the Principal verbally disputed the claim without providing any supporting documentation, the surety deemed the claim disputed and would investigate no further. In seven instances the Company failed to pursue a diligent investigation and also persisted in seeking information not reasonably required for or material to resolution of a claim dispute. This includes the required completion of an eight page claim form when substantial proof was supplied at notice of claim. One general violation was alleged as the claim form sent to all homeowners indicating a Breach of Contract, included questions not material to the resolution of the claim. The Department alleges these acts are in violation of CCR § 2695.10(d).


Summary of Company Response: "Although ACIC disagrees that its investigations were either not diligent or sought unnecessary information, ACIC has attempted to address the CDI's concerns by modifying its practices and is committed to providing the highest quality claims service to the claimants and principals. First, the claim manual has been supplemented to provide for the use of expert inspections, evaluations and reports in appropriate circumstances. In particular, such inspections are now being used when the claimant and principal dispute the quality or completeness of the principal's work and/or the amount required to correct or complete the work and those issues cannot be determined based on information otherwise obtained during the claim investigation. This ensures both that claim investigations are thorough and that ACIC does not conclude that a claim is subject to a dispute it cannot determine when an inspection can objectively eliminate the dispute. Second, the claim form has been shortened and simplified to streamline the claim process for the claimant. Third, the claim manual has been supplemented to require ACIC's claim examiners to telephone the claimant and the principal and attempt to speak directly with each of them in order to further investigate claims, to focus and assist the claimant's efforts to perfect his, her or its claim, and to ensure that the principal is aware of the particulars of the claim and has an adequate opportunity to respond to the claim. Finally, ACIC has increased its Contractors License Bond claim staff from 9 to 14, or 56%) so that it may assign fewer claims to each claims staff member and allow the staff to spend more time on each claim.
The CDI examined 128 claim files and criticized 34 of them. Of the 34 criticized claim files, only 28 of them involved an alleged failure to diligently pursue a claim investigation/persistence in seeking unnecessary information. Of those 28 claims, 5 were paid by ACIC, 9 were paid or resolved by the principal, and 4 were claims as to which the claimant was determined to be undeserving through litigation, arbitration or CSLB review. Of the remaining 10 claims, 1 involved a claimant who has not responded to ACIC's several post-examination attempts to contact him to discuss his claim, 5 are claims which ACIC has informed the claimants it is willing to re-examine, 3 are claims as to which ACIC stands by its denial, and 1 is a claim as to which ACIC is not able to locate the claimant or the principal. Accordingly, no harm has been occasioned by any alleged failure to diligently investigate and/or persistence in seeking unnecessary information."

2. The Company failed to represent correctly to claimants, pertinent facts or insurance policy provisions relating to any coverage at issue. In 18 instances, the Company failed to represent correctly to claimants pertinent facts relating to coverage at issue. The Company informed claimants that an independent investigation had been completed by the Company when no such investigation had been completed. The Company also informed the claimant in the acknowledgement and denial letters that the Company was not the appropriate party to resolve disputes between the principal and the claimant regarding damages resulting from violations of the Contractors License Law. The Company directs the claimant to the courts or the Contractors State License Board to obtain a judgment or arbitration award and then directs the claimant to re-submit the award to the bond for consideration of the claim. This effectively represents to the claimant that it is not the duty of the Company to investigate and resolve claims against the Contractor's License Bond and that an arbitration award or court judgment is necessary to perfect the claim. The Department alleges these acts are in violation of CIC §790.03(h)(1).

Summary of Company Response: "ACIC has modified its claim handling procedures to require that claim examiners contact the parties to investigate, probe and verify the parties' contentions and supporting evidence. In addition, ACIC now requires that experts be retained to conduct third-party inspections and evaluations when the extent or quality of the principal's work is in issue and cannot be determined from the information otherwise obtained in the claim investigation.

ACIC believes these changes in its claim handling procedures eliminate any question as to whether its claim investigations are "independent." However, ACIC disagrees that it previously falsely represented that its investigations were "independent." Although ACIC previously relied largely on information submitted by the parties, the fact that the information was obtained from the parties does not make ACIC's investigation any less "independent." The information was submitted to ACIC in response to its requests for that information, either in the form of a claim form or through written or telephonic follow-up. In any claim investigation, the most direct source of relevant information will be the claimant and the principal. Indeed, an insurer would be unable to investigate a claim without asking the parties for information. Nor does ACIC's decision to credit or disregard items of information submitted by one or the other of the parties in a given situation somehow render its investigation less "independent." Making such decisions is inherent in any claim determination process and ACIC made those decisions independently of the claimant and principal. To the extent the CDI believes ACIC made decisions to credit or disregard one or the other party's evidence in particular situations without a sufficient basis for doing so, the changes in its claim procedures described above should eliminate any such perceived deficiency. Dissatisfaction with the methods or extent of ACIC's investigation of a particular claim does not, however, render that investigation somehow not an investigation or not independent.


Further, although ACIC changed its claim handling procedures as described above in an attempt to put itself in a position to resolve every claim, whether or not disputed by the parties, ACIC nonetheless believes that any representations it made that it is not authorized to decide the parties' disputes were correct.
The claimant has the burden of proving his, her or its claim. See, e.g., National Auto. & Cas. Co. v. Stewart, 223 Cal. App. 3d 452, 462 (1990); Royal Globe Ins. Co. v. Whitaker, 181 Cal. App. 3d 532, 537-538 (1986); Olympic Club v. Underwriters at Lloyd's, London, 991 F.2d 497, 502 (9th Cir. 1993); Chamberlain v. Allstate Ins. Co., 931 F.2d 1361, 1364, 1365-1366 (9th Cir. 1991). Thus, a contractors license bond claimant bears the obligation to establish the principal's violation of the Contractors License Law and resulting covered harm. The principal has the primary duty to perform. Schmitt v. Insurance Co. of North Amer., 230 Cal. App. 3d 245, 257 (1991). The role of the surety is to guarantee that performance and, therefore, the surety is obligated only when the principal defaults. Cates Construction, Inc. v. Talbot Partners, 21 Cal. 4th 28, 38 (1999); Schmitt, supra at 257; Civil Code § 2810. The principal's default is a condition precedent to any liability under a surety bond. Civil Code §§ 2807, 2809. Thus, until the principal's legal obligation is established, a surety has no duty to pay and a denial of liability does not give rise to a cause of action on the bond. Schmitt, supra at 258. Before making payment under the bond, the surety may require the claimant to proceed against the principal. Civil Code § 2845; see also Civil Code § 2850. This obligates the claimant to file suit against the principal and carry the suit to judgment. Rutter, California Practice Guide: Insurance Litigation, § 6:3456 at p. 61-73. If the creditor fails to do so, the surety is exonerated to the extent that it is prejudiced thereby. Civil Code § 2845. The surety's statutory right to require the claimant to litigate his, her or its claim with the principal before seeking payment of the bond necessarily authorizes the surety to decline to pay when the claimant has not established the principal's default or where the claimant and principal are in the process of litigating the issue before a tribunal with authority to decide it. That statutory right demonstrates that ACIC is not the proper party to decide such matters.1 The Regulations recognize this limitation on ACIC's ability to decide disputed claims. See Regulation Section 2695.10(c) (recognizing that surety may not be able to determine claims that await a "third party determination"); Business and Professions Code § 7071.11(c). Informing the parties of ACIC's inability to adjudicate their disputes is therefore not a misrepresentation. It is a recognition that the claimant has not met his, her or its burden of proving the claim and that ACIC's investigation has not enabled it to settle the issues with reasonable confidence. Accordingly, ACIC disagrees that it was incorrect in representing that it is not the appropriate tribunal to determine the parties' disputes.
ACIC has not represented that it is not obligated to investigate and resolve claims. Rather, in the instances to which this criticism apparently refers, what ACIC did represent was that it was unable to make claim decisions with reasonable confidence in those particular instances because the principal's default was not established and was still subject to bona fide dispute, despite ACIC's investigation and attempt to resolve the claim. As discussed in correspondence with the CDI, that representation was true as a general proposition in the context of the particular claims. However, to address the CDI's concerns, ACIC has implemented changes to its claim procedures (expert inspections and telephonic follow up and investigation by claim examiners) that are designed to minimize and hopefully eliminate instances in which ACIC is unable to determine whether the claimant's or the principal's version of events is accurate and make a claim decision.
In summary, ACIC disagrees that it misrepresented pertinent facts or policy provisions to claimants. ACIC was not incorrect in representing to claimants that it conducted independent investigations. ACIC also was not incorrect in representing that it is not the proper authority to adjudicate the parties' disputes and is unable to pay a claim where, after a reasonable claim investigation, the principal's default remains uncertain and subject to dispute. Finally ACIC disagrees that it made any representation that it is not obligated to investigate and resolve claims. Accordingly, ACIC also disagrees with the CDI's allegation that it violated Section 790.03(h)(1). There simply is no pattern of unfair claims settlement practices arising from misrepresentation of pertinent facts or insurance policy provisions.
The CDI examined 128 claim files and criticized 34 of them. Of the 34 criticized claim files, only 18 of them involved an alleged failure to correctly represent pertinent facts or policy provisions to claimants. Of those 18 claims, 7 were paid by ACIC, 4 were paid or resolved by the principal, and 1 was a claim as to which the claimant was determined to be undeserving through litigation, arbitration or CSLB review. Of the remaining 6 claims, 1 involved a claimant who has not responded to ACIC's several post-examination attempts to contact him to discuss his claim, 3 are claims which ACIC has informed the claimants it is willing to re-examine, 1 is a claim as to which ACIC stands by its denial, and 1 is a claim as to which ACIC is not able to locate the claimant or the principal. Accordingly, no harm has been occasioned by any alleged failure to correctly represent pertinent facts or policy provisions to claimants."
This is an unresolved issued which may result in further administrative action.

3. The Company failed to effectuate prompt, fair, and equitable settlements of claims in which liability had become reasonably clear. In 15 instances, the Company failed to effectuate prompt, fair and equitable settlements of claims in which liability had become reasonably clear. The claimants had submitted sufficient proof of claim including industry expert reports from the Contractors State License Board, failed building inspection reports, industry expert opinions provided by third party contractors and copies of insufficient checks issued to unpaid suppliers. The surety not only considered this information insufficient to perfect a claim on the bond but also insufficient to trigger any additional investigation of the bond claim. Although liability was reasonably clear, the surety failed to promptly validate claims. The Department alleges these acts are in violation of CIC §790.03(h)(5).


Summary of Company Response: "To address this criticism and ensure that claims are resolved expeditiously and fairly, ACIC substantially modified its claim procedures to strengthen and extend the scope of its investigation and analysis of claims. ACIC has substantially shortened its claim form and eliminated the specific items on the claim form that the CDI indicated were sources of concern. In addition, ACIC's claims manual now directs its claim examiners to make direct contact with claimants and principals to follow up on outstanding issues and focus the parties' efforts to perfect and resolve the claim. This should result in ACIC receiving all pertinent information, as well as in a more thorough assessment of that information and consequently more accurate claim decisions. In addition, ACIC's claim manual now provides for the use of industry experts to inspect and evaluate the principal's work where necessary to reach an informed claim decision. This too will help ensure that claims are thoroughly and accurately assessed and decided.
These changes to ACIC's claim procedures are intended to eliminate the bases for Criticism No. 3 and help ensure that all of ACIC's claim decisions are prompt, fair and reasonable. However, ACIC respectfully disagrees that it previously failed to effectuate prompt, fair and reasonable settlements of claims in which liability had become reasonably clear. ACIC believes that, in each instance, its handling of the claim was reasonable and appropriate under the circumstances known to it at the time.
The CDI examined 128 claim files and criticized 34 of them. Of the 34 criticized claim files, only 15 of them involved an alleged failure to effectuate prompt, fair and reasonable settlements of claims in which liability had become reasonably clear. Of those 15 claims, 7 were paid by ACIC, 2 were paid or resolved by the principal, and 1 was a claim as to which the claimant was determined to be undeserving through litigation, arbitration or CSLB review. Of the remaining 5 claims, 3 are claims which ACIC has informed the claimants it is willing to re-examine, 1 is a claim as to which ACIC stands by its denial, and 1 is a claim as to which ACIC is not able to locate the claimant or the principal. Accordingly, no harm has been occasioned by any alleged failure to effectuate prompt, fair and reasonable settlements of claims in which liability had become reasonably clear."

4. The Company failed to provide necessary forms, instruction and reasonable assistance within 15 calendar days. In nine instances, the Company failed to provide the necessary instructions and reasonable assistance within 15 calendar days. The Company required the claimant to complete an eight page claim form prior to any consideration of the claim and failed to inform the claimant what additional proof of claim would be necessary to perfect a claim on the bond. The Company also referred the claimant to a website that includes all the laws of the State of California instead of reviewing the claim information submitted and informing the claimant what Sections of the Business and Professions Code most likely applied to the claim. The Department alleges these acts are in violation of CCR §2695.5(e)(2).


Summary of Company Response: "To address Criticism No. 4, ACIC has modified its claim procedures to make its claim investigations and handling more interactive with claimants. First, it has substantially shortened its claim form (and removed items from the claim form that were mentioned by CDI personnel as sources of concern). To the extent insufficient information is supplied with the simplified claim form, ACIC's claim examiners will contact the claimant by telephone to inquire into any missing information and to guide the claimant in perfecting his, her or its claim. These personal contacts will ensure that the claimant is informed on a timely basis what additional information is needed to perfect the claim, what information otherwise sought by the claim form is not needed, and what statutory provisions most likely relate to the claimant's claim. Finally, expert consultants will be used to determine the quality and extent of the principal's work where the information otherwise obtained in ACIC's investigation is insufficient to allow it to determine those issues.
Although ACIC has modified its claim procedures to make them more "user friendly" and interactive and eliminate the bases for Criticism No. 4, ACIC disagrees that there previously were any bases for the criticism.
ACIC begins investigating and considering a claim when it receives a notice of claim from a claimant. Its investigation and consideration did not await the claimant's completion of the prior claim form, although the claim form is generally the first step in ACIC's investigation. ACIC consistently began investigating via this procedure within 15 days of receiving a notice of claim. The cover letter accompanying the prior claim form and the prior claim form itself informed the claimant that he, she or it did not need to re-submit any information or materials that had already been submitted. The prior claim form thus let the claimants know what information and materials beyond those already submitted were needed. Because questions on the prior claim form that related only to particular kinds of claims were phrased in terms of that type of claim, the claimant could identify the questions which were not pertinent to his, her or its claim. Claimants routinely ignored such questions on the prior claim form or marked them as inapplicable and ACIC did not require that claimants respond to such questions before it would consider their claims.
Although ACIC supplied claimants with the address of a website that sets forth the laws of the State of California, its prior claim form identified the provisions that relate to particular types of claims covered by its bonds. Moreover, ACIC did not require the claimant to identify the statutory provisions on which he, she or it was relying in making a claim. Rather, where the claimant did not identify relevant statutory provisions, ACIC identified the relevant provisions from the information available to it and continued with its investigation and determination of the claim.
The CDI examined 128 claim files and criticized 34 of them. Of the 34 criticized claim files, only 9 of them involved an alleged failure to provide necessary forms, instructions and reasonable assistance within 15 calendar days. Of those 9 claims, 4 were paid or resolved by the principal, and 2 were claims as to which the claimant was determined to be undeserving through litigation, arbitration or CSLB review. Of the remaining 3 claims, 1 involved a claimant who has not responded to ACIC's several post-examination attempts to contact him to discuss his claim, and 1 is a claim which ACIC has informed the claimant it is willing to re-examine, and 1 is a claim as to which ACIC stands by its denial. Accordingly, no harm has been occasioned by any alleged failure to provide necessary forms, instructions and reasonable assistance within 15 calendar days."

5. The Company failed to provide written notification that the claimant may have the matter reviewed by the California Department of Insurance. In nine instances, the Company failed to provide written notification, on a claim denial or rejection, that the claimant may have the matter reviewed by the California Department of Insurance and failed to provide the address and telephone number of the unit of the Department which reviews complaints regarding claims practices. The claims cited included substantial documentation including construction contracts, estimates to complete, third party industry expert reports, copies of canceled checks, correction notices from city inspectors, payment schedules, and invoices from unpaid suppliers. The Department alleges this act is in violation of CCR §2695.10(b).


Summary of Company Response: "This criticism refers to instances in which ACIC received an initial contact by a putative claimant, acknowledged the contact, sent the putative claimant a claim form, and received no response. In each instance, when ACIC did not receive a response, it wrote to the putative claimant asking for a response and advising that failure to respond would lead ACIC to believe the putative claimant did not wish to pursue a claim.
In each of these instances, ACIC received little or no documentation from the putative claimant at the initial contact and, hence, did not treat the contact as the submission of a claim and thus open a claim file. Accordingly, ACIC did not deny such "claims." Rather, ACIC informed the putative claimant that it assumed that he, she or it did not wish to pursue a claim because there had been no response or other attempt to proceed with a claim. ACIC invited the putative claimant to contact it if its assumption was incorrect.
ACIC's letters were intended to induce a response by the putative claimant and, in the absence of a response, confirm that no claim was being pursued. ACIC did not intend these letters as denying or rejecting a claim. Accordingly, ACIC did not conclude that written notification that the matter could be reviewed by the CDI was required.
ACIC has addressed this Criticism No. 5 as follows. ACIC now treats every submission of any documentation as a claim, opens a claim file and assigns a claim number. In addition to sending the claimant a claim form, ACIC's revised claims manual requires its claim examiners to follow up and investigate by telephone. In the future, when ACIC determines, by correspondence, telephonic contact, the claimant's non-responsiveness or otherwise, that a claimant does not wish to pursue the claim, ACIC will write to the claimant to confirm its understanding of that fact, invite the claimant to contact it if it is mistaken, and include the notification required by Regulation Section 2965.10(b) in its closing letter to the claimant.
The CDI examined 128 claim files and criticized 34 of them. Of those 34 criticized claim files, only 8 of them involved an alleged failure to provide written notification that the claimant may have the matter reviewed by the CDI. Of those 8 claims, 1 was paid by ACIC, 4 were paid or resolved by the principal, and 1 was a claim as to which the claimant was later determined to be undeserving through litigation, arbitration or CSLB review. Of the remaining 2 claims, 1 is a claim as to which ACIC stands by its denial, and 1 is a claim as to which ACIC is not able to locate the claimant or the principal. Accordingly, no harm has been occasioned by any alleged failure to provide written notification that the claimant may have the matter reviewed by the CDI."

6. The Company failed to acknowledge notice of claim within 15 calendar days. In one instance, the Company failed to acknowledge notice of claim within 15 calendar days. The Department alleges this act is in violation of CCR §2695.5(e)(1).


Summary of Company Response: "ACIC's claim manual, calendaring system, and claim examiner training all require that notices of claims be acknowledged within 15 calendar days or less. ACIC does not know why this was not done in the lone instance to which Criticism No. 6 refers. ACIC has re-emphasized with its claims staff the timing standards set by Regulation Section 2695.5 and the importance of meeting those standards in order to ensure that all deadlines are met in the future.
Only 1 claim involved an alleged failure to acknowledge notice of claim within 15 calendar days. That claim was paid by the principal. Accordingly, no harm has been occasioned by any alleged failure to acknowledge notice of claim within 15 calendar days."

7. The Company failed to adopt and implement reasonable standards for the prompt investigation and processing of claims. In one instance, the Company had collateralized bonds in the anticipation of potential claims reimbursement. When the bonds had expired and the license of the principal had expired for more than two years, there was no longer any claims exposure on these bonds. The Company did not have a system in place to identify these bonds and return the collateral to the principal. It was unreasonable to retain funds on deposit when the Company was aware that no claims exposure existed. The Department alleges this act is in violation of CIC §790.03(h)(3).


Summary of Company Response: "ACIC's collateral agreements with its principals allocate to the principals the burden of requesting the release of collateral at the point in time when it is no longer necessary to secure ACIC's right to reimbursement. ACIC did not independently track the point in time at which a given principal's collateral was eligible for release, notify the principal of that eligibility, or release the collateral in the absence of contact from the principal. However, ACIC always promptly returned collateral to a principal who requested its return if the collateral was eligible for release.
Nonetheless, since the examination, ACIC has implemented a system to periodically review the collateral it holds and release collateral which is no longer needed to secure a principal's reimbursement obligation because the passage of time since expiration of the bond has eliminated any possibility of further exposure on the bond.
ACIC's collateral transactions with its principals therefore should not be an issue in the future. In any event, ACIC's previous system of relying on principals to request the release of their collateral cannot constitute a failure to adopt or implement reasonable standards for the prompt investigation and processing of claims under Insurance Code § 790.03(h)(3). The return of collateral is the cancellation of a security arrangement, not the payment of benefits under a bond or policy. This view is supported by the legislative history of Section 790.03(h), as well as the import of Regulation Sections 2695.1(a) and 2695.2(a)(2),(c),(n) and (s). Indeed, collateral is only eligible for return once a sufficient amount of time has passed after the bond has expired. By definition, then, collateral returns cannot implicate the investigation or processing of claims under a surety bond since such returns only arise when the bond is no longer in effect and no further claims on the bond are possible. Moreover, even if the return of collateral could somehow be deemed a claim settlement or payment, the situation to which this criticism refers is one in which no claim is ever made because the principal did not request his, her or its collateral. Again, ACIC's former system for the return of collateral does not implicate Section 790.03(h).
This issue is extrinsic to the claims the CDI examined and no harm was occasioned by ACIC's former collateral return system to any claimant. Moreover, ACIC always promptly returned collateral to a principal who requested its return if the collateral was eligible for release, and since the examination, has released all other eligible collateral. Accordingly, no harm has been occasioned by any ACIC's collateral release practices."

1 That right is given to the surety for its protection. Although a surety is free to pay on the bond without requiring litigation, it need not do so. See Civil Code §2847. Where the surety pays without a judgment compelling it to do so, the surety risks claims of "volunteerism" by the principal in defense of the surety's claim for reimbursement. "To entitle the guarantor or surety to reimbursement, contribution or subrogation on account of payments made on behalf of its principal, it must appear that such payments were made under compulsion; that is under a legal obligation, and not as a mere volunteer." Schlitz v. Thomas, 61 Cal. App. 635, 638 (1923). The right to indemnification from the principal is limited to payments that were necessary and warranted. See Arntz Contracting Co. v. St. Paul Fire & Marine Ins. Co., 47 Cal. App. 4th 464, 482 (1996). In other words, reimbursement for payments made in the absence of a judgment is allowed only where it can be shown that liability was clearly established and that the suit would have been a formality. Ragghianti v. Sherwin, 196 Cal App. 2d 345, 351 (1961). The surety cannot be deprived of its contractual and statutory right to seek reimbursement from the principal, nor of its statutory right to require the claimant to first proceed against the principal, by administrative fiat. Civil Code §§ 2845, 2847.

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Last Revised - March 17, 2006
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