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III. RATING, UNDERWRITINGAND POLICYHOLDER SERVICEA. INTRODUCTIONThe examiners reviewed 151 randomly selected new and renewal policiesfrom Hanover’s population of 2,829 and Hanover New Jersey’s population of42,113 personal auto policies in force as of September 30, 2005. The reviewperiod for this current examination overlapped Hanover Insurance Company’stransition of policies from Hanover to Hanover New Jersey InsuranceCompany. The transition period began on July 1, 2004 when Hanover ceasedwriting new business policies and Hanover New Jersey started writing newbusiness policies. The transition for renewals started on October 15, 2004.Beginning on this date, any Hanover policy that came due for renewal wasnonrenewed and simultaneously offered coverage with Hanover New Jersey.New Jersey Department of Banking and Insurance (NJDOBI) Order C04-104 setforth the guidelines for the transition process. One section of the Orderaddressed the timeframes for sending out renewal notices. In that section, theDepartment permitted the Company to extend the timeframes for sending arenewal notice from between 45 and 30 days prior to policy expiration tobetween 90 and 65 days prior to expiration of the current policy. The extendedtime frames Permitted Hanover New Jersey to issue a nonrenewal notice onHanover Insurance Company’s behalf. Concurrent with the nonrenewal notice,Hanover New Jersey issued an offer of coverage to insureds’ whose policieswere nonrenewed by Hanover Insurance Company.The examiners checked for compliance with Order C04-104 and applicablestatutes and regulations including N.J.S.A. 17:29A-6, 15, 36 and 38 (filed andapproved rating methods), N.J.A.C. 11:3-39 (premium discounts), N.J.A.C.11:3-39.4 (anti-theft discounts), N.J.A.C. 11:3-15 (coverage selection forms),N.J.A.C. 11:3-36 (physical damage inspections), N.J.A.C. 11:3-35 (automobileinsurance underwriting rules), N.J.A.C. 11:3-19A (Tier rating plans andunderwriting rules) and N.J.A.C. 11:3-47 (insurance scenarios). Thesestatutory and administrative requirements relate to the NAIC Standards ofChapter VIII – Conducting the Property and Casualty Insurance Examination ofthe Market Conduct Examiners Handbook.6

B. ERROR RATIOSThe examiners calculated the error ratios by applying the procedure outlinedin the introduction of this report. Error ratios are itemized separately based onthe review samples as indicated in the following charts.FilesReviewedFiles in ErrorError Ratio000%501020%Hanover InsuranceCompany4100%Hanover New JerseyInsurance Company601817%1512819%ReviewNew Business PoliciesHanover InsuranceCompany*Hanover New JerseyInsurance CompanyRenewal PoliciesTotal* Hanover Insurance Company ceased writing new business policies effective July, 12004C. EXAMINERS’ FINDINGS1. Deficient Renewal Billing Notices/Failure to Advise Insured ofPayment Options – 101 Files in Error – (Improper General BusinessPractice)N.J.A.C. 11:3-8.3(b)2iii states in part that renewal billing notices shallclearly and conspicuously include a statement advising whether the insured hasthe option to make payment to the insurance producer.The examiners reviewed sample billing notices and determined that Hanoverdid not include the required statement to the insured which advises of theoption to pay the insurance producer.7

In response to inquiries, the Company agreed with the examiners’ findings.Since these deficiencies were present on all renewal billing notices, theexaminers cited this error as an improper general business practice.S E E A P P EN D I X B - 1 F O R A L I ST O F F IL ES I N ER R O R2. Failure to Grant Anti-Theft Discount – 14 Files in Error (ImproperGeneral Business Practice)N.J.S.A. 17:33B-44 and N.J.A.C. 11:3-39.4 require every insurer writingphysical damage coverage to provide a reduction in the base rates for privatepassenger vehicles equipped with one or more anti-theft or vehicle recoverydevices. In addition, and pursuant to N.J.S.A. 17:29A-6 & 15, the rate manualthat the Commissioner has approved for Hanover New Jersey’s use requires theCompany to discount premiums for physical damage coverage whenever avehicle has an anti-theft device.Contrary to the above statutes, the Company failed to apply the anti-theftdiscount to nine out of the 50 new business policies and 5 out of 60 renewalpolicies reviewed. The examiners further determined that there were a total of17 vehicles that were eligible for the anti-theft discount on a total of 14 policescited this error. While in some instances information regarding the anti-theftsystem was not on the original application, it did nevertheless appear on thecompany’s physical damage inspection report. In other instances, eligibility forthis discount was evident on the new car window sticker that was provided tothe company. Hanover disagreed with many of the examiner’s findings, and inresponse to inquiries stated, “Anti-theft credits are added to each vehicle basedon information provided by the insured to the agent.” The Company furtheradvised that the system generates anti-theft credits based on the informationentered by the agent when the agent keys in the vehicle. The examiners note,however, that Hanover is ultimately responsible for rating and underwriting apolicy in accordance with its filed and approved rating plan. The examinerscited this error as an improper general business practice.S E E A P P EN D I X B - 2 F O R A L I ST O F F IL ES I N ER R O R3. Insufficient Renewal Billing Notice Time - 11 Files in ErrorN.J.A.C. 11:3-8.3(b) states that each renewal offer shall be in the usualform of either a renewal policy, a certificate, or a renewal offer or bill. Arenewal offer or bill shall indicate the date by which the renewal premium isdue. The renewal bill or offer shall be mailed or delivered by the insurer to theinsured not more than 45 days and not less than 30 days prior to the date therenewal premium is due. However, in order to transition business from theHanover Insurance Company to the Hanover New Jersey Insurance Company,NJDOBI Order C04-104 required Hanover to issue notices of nonrenewal topolicyholders at least 65 days and not more than 90 days prior to the expiration8

of the policy. Additionally, the Order specified that offers of coverage toeligible Hanover Insurance Company policyholders should be mailed with thenonrenewal notices from Hanover Insurance Company. The time requirementsspecified in the order applied to all policies with renewal effective datesbetween October 16, 2004 and October 15, 2005.While reviewing the Company’s underwriting files, the examiners found 11policies where the Company failed to comply with the time frames listed inOrder C04-104. The renewal notices for the 11 policies cited were issuedbetween 56 and 62 days prior to the renewal period, which is contrary to thisOrder. In response to inquires, the Company agreed with the examiners’findings.S E E A P P EN D I X B - 3 F O R A L I ST O F F IL ES I N ER R O R4. Deficient Coverage Selection Form – 1 File in ErrorPursuant to N.J.A.C. 11:3-15.6(a), each insurer shall have a separateCoverage Selection Form for the Standard Policy and for the Basic Policy,using the text found in Appendix Exhibits 1 and 2 of that regulation. Whileconducting a review of Hanover New Jersey’s new business policies, theexaminers found one policy that utilized coverage selection form number 2311085 (6-03). This form is deficient because, even though it listed severaldeductibles from which the applicant could choose, it failed to include therequired 750.00 deductible that is the standard deductible for collision andcomprehensive coverage. Failure to list this deductible is contrary to theregulation stated above.The Company agreed with the examiners and stated in part that an agencymay have inadvertently retained and used old stock instead of new, revisedforms.S E E A P P EN D I X B - 4 F O R A L I ST O F F IL ES I N ER R O RD. GENERAL FINDINGS1. Failure to Follow Filed and Approved Underwriting Guidelines - 1File in ErrorN.J.S.A. 17:29A-6 & 15 require insurers to file a rating plan with theCommissioner for approval and does not allow insurers to charge, demand orreceive a premium for any policy of insurance except in accordance with therespective rating systems on file with and approved by the Commissioner.Hanover’s filed and approved underwriting and rating plan allows it to assesspoints for a lapse in coverage for the purposes of aiding in determining tier9

level. Such points are assessed for a total of three years, starting at the firstpolicy period immediately after the lapse occurred.While reviewing the Company’s renewal policies, the examiners found onepolicy where the insured experienced a one day lapse in coverage whileswitching from another insurance carrier to Hanover. Hanover assigned theappropriate number of eligibility points and placed the insured in a higher ratedtier. However, at the end of three-year point exposure period, Hanover failedto remove these points, causing the policy to renew once again in the highertier when the insured was eligible for a lower-rated tier.In response to an inquiry, the Company agreed with the examiners’ findingsand stated that it would rerate the insured and return the appropriate premiumto the insured.S E E A P P EN D I X B - 5 F O R A L I ST O F F IL ES I N ER R O RE. SUMMARY AND COMPARISON TO 2000 MARKETCONDUCT EXAMINATION REPORTThe examiners checked for compliance with the recommendations specifiedin the 2000 market conduct examination report and found only one error thatwas repeated in the current examination – failure to issue renewal billingnotices in a timely manner.In the 2000 examination the examiners found 45 rating and underwritingrandom sample errors on 80 files, resulting in an error rate of 56%. The currentexamination yielded 28 errors out of 151 files reviewed for an error rate of19%.10

IV. TERMINATIONSA. INTRODUCTIONDuring the review period October 1, 2004 to September 30, 2005,Hanover Insurance Company nonrenewed 251 automobile policies andHanover New Jersey Insurance Company nonrenewed 13 automobilepolicies. In the same period, Hanover Insurance Company cancelled twopolicies within the first 60 days and 214 policies beyond the first 60 days.Hanover New Jersey cancelled 1,451 policies within the first 60 days andcancelled 2,597 policies beyond the first 60 days.Errors, described by type, appear in the chart that follows in the nextsubsection. The examiners checked for compliance with applicable statutesand regulations and NAIC standards related to this area. These includedN.J.A.C. 11:3-8 (nonrenewal of automobile policies), N.J.S.A. 17:33B-15and 16 (“Take All Comers” laws), N.J.A.C. 11:3-34 and N.J.A.C. 11:3-40(eligible persons), N.J.A.C. 11:3-44 (rules for effecting auto insurancecoverage), N.J.A.C. 11:3-33 (appeals from denial of insurance), N.J.S.A.17:29C-7 and 10 (automobile insurance cancellations) and NAIC Standards15 (rejections and declinations), 16 and 17 (cancellation/nonrenewalnotices) outlined in the NAIC Handbook.B. ERROR RATIOSReviewFile ReviewFiles in ErrorError Ratio13878062%0%Sub Totals10088%Hanover New JerseyNonrenewalsFirst 60 Day CancellationsSub TotalsOverall Totals135181181301321100%0%72%18%Hanover Ins CoNonrenewalsFirst 60 day CancellationsC. EXAMINERS’ FINDINGS1. Failure to Provide Proper Time for Notice on Nonrenewals - 4 Filesin Error11

N.J.A.C. 11:3-8.3(e) states that a notice of nonrenewal shall not be validunless it is mailed or delivered by the insurer to the named insured policyholderno less than 60 days and no more than 90 days prior to the expiration of thecurrent policy. Contrary to the above stated regulation, the examiners foundthat Hanover Insurance Company provided notice in excess of the maximumtime period specified in N.J.A.C. 11:3-8.3(e). Days in error ranged from 1 to15 days in excess of the maximum 90 day notice period.PLEASE SEE APPENDIX C1 FOR LIST OF FILES IN ERROR2. Failure to State Information Sources on Termination Notices – 5Files in ErrorN.J.A.C. 11:3-8.3(e)1 states that, “A notice of nonrenewal shall not be validunless it includes facts necessary for identification of the incident(s) ” thatthe insurer relied upon in its decision to terminate the policy. In addition,N.J.S.A. 17:33B-16 and N.J.A.C. 11:3-33.4(a) & (b) require insurers toexplain the reasons for termination in a manner that is comprehensive andwhich identifies the specific basis upon which an insured is ineligible.Contrary to the statute and regulations stated above, the examiners found 5nonrenewal notices in which Hanover failed to identify the source(ChoicePoint, CLUE, MVR Reports, etc) from which it obtained information onthe accidents, and further failed to identify violations that it referenced as thereason for termination.PLEASE SEE APPENDIX C2 FOR LIST OF FILES IN ERROR3. Failure to Provide the Designated Provision under which Action istaken to Nonrenew a Policy - 4 Files in ErrorN.J.A.C. 11:3-8.3(e)1 states that a notice of nonrenewal shall not be validunless it contains the designated provision under which action is being taken.The examiners noted that on four nonrenewal notices the Company failed toinclude the regulatory provisions under which the Company terminated thesepolicies. Hanover agreed with these errors.PLEASE SEE APPENDIX C3 FOR LIST OF FILES IN ERROR4. Failure to Abide by Provisions of Commissioner’s Order C04-104 onInternal Policy Transfers - 8 Files in ErrorConsent Order C04-104 names Hanover Insurance Company as a party to aConsolidation Market Transaction. This Transaction involved nonrenewing12

current Hanover Insurance Company policyholders, and then offering coveragewith Hanover of New Jersey. Pursuant to the Order, Hanover InsuranceCompany agreed to “ cause to be issued notices of non-renewal to its privatepassenger automobile insurance policyholders, which shall be mailed to ordelivered to the insured at least 65 days but no more than 90 days prior to theexpiration date of such policies in accordance with New Jersey Law ”Contrary to the above-stated Order, Hanover Insurance Company failed toprovide at least 65 day’s notice of nonrenewal. Days for notice ranged from alow of 56 to a high of 63.PLEASE SEE APPENDIX C4 FOR LIST OF FILES IN ERROR13

V. CLAIMSA. INTRODUCTIONThis review covers Personal Injury Protection (PIP) and Total Loss claimssubmitted under private passenger automobile insurance. Any New Jerseyclaim closed between October 1, 2004 and September 30, 2005 was subject toreview. Hanover paid 2,716 PIP claims and closed 898 PIP claims withoutpayment. The Company also closed 1,330 paid total loss claims. From thistotal, the examiners randomly selected and reviewed 170 paid PIP, denied PIPand total loss claims.In reviewing each claim, the examiners checked for compliance with allapplicable statutes and regulations that govern timeliness requirements insettling first party claims. The examiners conducted specific reviews placingparticular emphasis on N.J.S.A. 17:29B-4(9), N.J.A.C. 11:2-17 (Unfair Claimsand Settlement Practices), N.J.A.C. 11:3-10.4 (Adjustment of Total Losses)and N.J.S.A. 39:6A-5 (payment of Personal Injury Protection Benefits). Theserequirements relate to the NAIC Market Conduct standards of Chapter VI Property and Casualty Insurance Examinations.B. ERROR RATIOSThe examiners calculated the error ratios by applying the procedure outlinedin the introduction of this report. Error ratios are itemized separately based onthe review samples as indicated in the following charts. The review consistedof one randomly selected bill from each file.Paid Random SampleFiles ReviewedFiles in ErrorError RatioHanover Insurance751419%Hanover New Jersey25728%1002121%22314%700%29310%Pip ClaimsPaid PIP SubtotalTotal LossesHanover InsuranceHanover New JerseyTotal Loss Subtotal14

Denied Random SampleFiles ReviewedFiles in ErrorError RatioHanover Insurance27311%Hanover New Jersey14321%41615%1703018%Pip ClaimsDenied PIP SubtotalRandom TotalsC. PERSONAL INJURY PROTECTION CLAIMS1. Failure to Settle PIP Claims Timely – 15 Files in Error (ImproperGeneral Business Practice)N.J.S.A. 39:6A-5(g) states that a claim "shall be overdue if not paid within60 days after the insurer is furnished written notice of the fact of a coveredloss " N.J.A.C. 11:2-17.7(b) states that, "The maximum period for allpersonal injury protection (PIP) claims shall be 60 calendar days after theinsurer is furnished written notice of the fact of a covered loss; providedhowever that an insurer may secure a 45-day extension in accordance withN.J.S.A. 39:6A-5.” In addition, the examiners checked for compliance withStandard number three in the claims section of the NAIC Market ConductExamination handbook which states that the examiners should verify thatclaims are resolved in a timely manner.The examiners reviewed 100 paid PIP claims and found 15 (ten fromHanover Insurance Company and five from Hanover New Jersey) in which theCompany failed to pay the claim within the maximum periods specifiedN.J.S.A. 39:6A-5(g) and N.J.A.C. 11:2-17.7(b). Delays ranged from a low of6 days beyond 60 to a high of 192 days beyond 60. In response to theexaminers’ inquiries, Hanover agreed with these errors.SEE APPENDIX D-1 FOR A LIST OF FILES IN ERROR2. Failure to Pay Interest on Delayed PIP Payments – 14 Files inError (Improper General Business Practice)N.J.S.A. 39:6A-5(h) requires the payment of interest on all overduebenefits. This is relative to Standard number six in the claims section of theNAIC Market Conduct Handbook, which states that “Claims (should be)15

properly handled in accordance with policy provisions and applicable statutes,rules and regulations.”The examiners found that Hanover failed to pay interest on 14 (ten fr

Jersey Insurance Co. Through June 30, 2009 The Hanover Insurance Co. has guaranteed the operations of The Hanover New Jersey Insurance Co.; as of July 1, 2009 The Hanover New Jersey Insurance Co. will be a stand-alone company with no further support, guarantees, reinsurance or assistance of any form from The Hanover Insurance Co. and its .