PUBLIC REPORT OF THE MARKET CONDUCT EXAMINATION

OF THE CLAIMS PRACTICES OF THE


FIRST AMERICAN SPECIALTY INSURANCE COMPANY
NAIC # 34525 CDI # 3091-6
FIRST AMERICAN PROPERTY AND CASUALTY INSURANCE COMPANY
NAIC # 37710 CDI # 2332-5

AS OF OCTOBER 31, 2005


STATE OF CALIFORNIA


DEPARTMENT OF INSURANCE

MARKET CONDUCT DIVISION

FIELD CLAIMS BUREAU

TABLE OF CONTENTS

SALUTATION.......................................................................................1


SCOPE OF THE EXAMINATION...............................................................2
CLAIMS SAMPLE REVIEWED AND OVERVIEW OF FINDINGS......................3
TABLE OF TOTAL CITATIONS.................................................................4
TABLE OF CITATIONS BY LINE OF BUSINESS...........................................5
SUMMARY OF RESULTS.........................................................................6

STATE OF CALIFORNIA	John Garamendi,	Insurance Commissioner
DEPARTMENT OF INSURANCE
Consumer Services and Market Conduct Branch Field Claims Bureau, 11th Floor 300 South Spring Street Los Angeles, CA 90013

March 14, 2006

The Honorable John Garamendi

Insurance Commissioner

State of California

45 Fremont Street

San Francisco, California 94105


Honorable Commissioner:
Pursuant to instructions, and under the authority granted under Part 2, Chapter 1, Article 4, Sections 730, 733, 736, and Article 6.5, Section 790.04 of the California Insurance Code; and Title 10, Chapter 5, Subchapter 7.5, Section 2695.3(a) of the California Code of Regulations, an examination was made of the claims practices and procedures in California of:

First American Specialty Insurance Company
NAIC # 34525
First American Property and Casualty Insurance Company
NAIC # 37710
Group NAIC # 0070

Hereinafter referred to as The Companies, FASIC and FAPCIC

This report is made available for public inspection and is published on the California Department of Insurance web site ( www.insurance.ca.gov) pursuant to California Insurance Code section 12938.

SCOPE OF THE EXAMINATION


The examination covered the claims handling practices of the aforementioned Companies during the period November 1, 2004 through October 31, 2005. The examination was made to discover, in general, if these and other operating procedures of the Companies conform with the contractual obligations in the policy forms, to provisions of the California Insurance Code (CIC), the California Code of Regulations (CCR), the California Vehicle Code (CVC) and case law. This report contains only alleged violations of Section 790.03 and Title 10, California Code of Regulations, Section 2695 et al. The alleged violations of other relevant laws which resulted from this examination are included in a separate report which will remain confidential subject to the provisions of CIC Section 735.5. .

To accomplish the foregoing, the examination included:

1. A review of the guidelines, procedures, training plans and forms adopted by the Companies for use in California including any documentation maintained by the Companies in support of positions or interpretations of fair claims settlement practices.
2. A review of the application of such guidelines, procedures, and forms, by means of an examination of claims files and related records.
3. A review of consumer complaints received by the California Department of Insurance (CDI) in the most recent year prior to the start of the examination.
The examination was conducted at the offices of the Companies in Santa Ana, California.
The report is written in a "report by exception" format. The report does not present a comprehensive overview of the subject insurer's practices. The report contains only a summary of pertinent information about the lines of business examined and details of the non-compliant or problematic activities or results that were discovered during the course of the examination along with the insurer's proposals for correcting the deficiencies. When a violation is discovered that results in an underpayment to the claimant, the insurer corrects the underpayment and the additional amount paid is identified as a recovery in this report. All unacceptable or non-compliant activities may not have been discovered. Failure to identify, comment on or criticize activities does not constitute acceptance of such activities.
Any alleged violations identified in this report and any criticisms of practices have not undergone a formal administrative or judicial process.

CLAIM SAMPLE REVIEWED AND OVERVIEW OF FINDINGS

The examiners reviewed files drawn from the category of Closed Claims for the period November 1, 2004, through October 31, 2005, commonly referred to as the "review period". The examiners reviewed 178 FASIC claim files and 63 FAPCIC claim files. The examiners cited 23 claim 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.

First American Specialty Insurance Company
LINE OF BUSINESS / CATEGORY	CLAIMS FOR REVIEW PERIOD	REVIEWED	CITATIONS
Homeowners / Dwelling Property Fire	684	62	3
Homeowners / HO-3 Homeowners	4103	67	9
Homeowners / HO-6 Condominium	172	49	5
TOTALS	4959	178	17

First American Property and Casualty Insurance Company
LINE OF BUSINESS/CATEGORY	CLAIMS FOR REVIEW PERIOD	REVIEWED	CITATIONS
Homeowners / HO-3 Homeowners	796	63	6
TOTALS	796	63	6

TABLE OF TOTAL CITATIONS
Citation	Description	First American Specialty Ins. Co.	First American Property & Casualty Ins. Co.
CIC § 790.03(h)(3)	The Company failed to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under its insurance policies.	9	4
CCR § 2695.7(b)(1)	The Company failed to provide written basis for the denial of the claim.	3	0
CCR § 2695.7(b)(3)	The Company failed to include a statement in its claim denial that, if the claimant believes the claim has been wrongfully denied or rejected, he or she may have the matter reviewed by the California Department of Insurance.	2	0
CCR § 2695.3(a)	The Company's claim file failed to contain all documents, notes and work papers that pertain to the claim.	1	1
CCR § 2695.5(d)	The Company's claims agent failed to immediately transmit notice of claim to the insurer.	1	0
CCR § 2695.7(b)	The Company failed, upon receiving proof of claim, to accept or deny the claim within 40 calendar days.	1	1
Total Citations		17	6

TABLE OF CITATIONS BY LINE OF BUSINESS
Homeowners / DP-3 DWELLING-FIRE	NUMBER OF CITATIONS
CCR § 2695.7(b)(3)	2
CCR § 2695.5(d)	1
SUBTOTAL	3
Homeowners / HO6-CONDOMINIUM	NUMBER OF CITATIONS
CIC § 790.03(h)(3)	3
CCR § 2695.7(b)(1)	2
SUBTOTAL	5
Homeowners / HO-3 HOMEOWNERS	NUMBER OF CITATIONS
CIC § 790.03(h)(3)	10
CCR § 2695.3(a)	2
CCR § 2695.7(b)	2
CCR § 2695.7(b) (1)	1
SUBTOTAL	15

TOTAL

23

SUMMARY OF RESULTS

1. In 13 instances, the Companies failed to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under its insurance policies. When processing theft claims and when a claimant had no receipts, the companies depreciated the item or items stolen by an automatic 50% of RCV until the claimant replaced it with an identical item under the RCV provision. There is neither a written policy that addresses this practice by amendment nor policy provision addressing this practice and the files do not indicate how the depreciation was determined. The Department alleges these acts are in violation of CIC§790.03(h)(3).

Summary of Companies' Response: The Companies state: "We recognize that any depreciation taken on the settlement value of a loss must be discernable and documented. We have taken steps to reinforce the companies' practice of fully documenting all claim files by re-training the claim handlers as well as requiring outside vendors to provide full documentation of the basis of any depreciation taken, all to ensure compliance with the regulations."

2. In three instances, the Company failed, to provide the written basis for the denial of the claim. In three instances, the Company failed to provide written basis for the denial of the claim. The Department alleges these acts are in violation of CCR § 2695.7(b)(1)

Summary of Company Response: The Company accepts the criticism. They will address the Department's concern with the individual claim handler and continue to insure compliance through use of training, internal audits and supervisory input.

3. In two instances, the Companies' failed to maintain all documents, notes and work papers in the claim file. In one instance, an inventory sheet used to determine the settlement amount was missing. In another instance the depreciation was unsupported. The Department alleges these acts are in violation of CCR § 2695.3(a).

Summary of Companies' Response: The Companies acknowledge the Examiner's findings. The claims handlers were individually counseled to ensure future compliance.

4. In two instances, the Companies failed, upon receiving proof of claim, to accept or deny the claim within 40 calendar days. In two instances, the Companies failed upon receiving proof of claim, to accept or deny the claim within 40 calendar days. The Department alleges these acts are in violation of CCR § 2695.7(b)

Summary of Companies' Response: The Companies acknowledge that they failed to accept the claims within forty calendar days upon receiving proof of claim. In one instance there was a recovery of $1406.39 paid to a consumer for depreciation which had been initially subtracted from the claim payment. The Companies will continue to ensure compliance through training programs, supervisory input and internal audits.

5. In two instances, the Company failed to include a statement in its claim denial that, if the claimant believes the claim has been wrongfully denied or rejected, he or she may have the matter reviewed by the California Department of Insurance. The Department alleges these acts are in violation of CCR § 2695.7(b)(3)

Summary of Company Response: The Company agrees with the finding. The Company addressed the Department's concern with the individual claims handler and will continue to ensure compliance through use of training, internal audits and supervisory input.

6. In one instance, the Company claims agent failed to immediately transmit notice of claim to the insurer. The Department alleges this act is in violation of CCR § 2695.5(d)

Summary of Companies' Response: The Company acknowledges this finding and states that it is an isolated instance. As a result of the examination, the Broker was contacted and reminded to immediately transmit notice of a claim to the Company.

Last Revised - June 08, 2006
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