Los Angeles, CA — State Farm’s announcement on Friday that it would immediately stop selling homeowners insurance to new customers in California is unlawful under Proposition 103, and appears intended to force Insurance Commissioner Ricardo Lara to rubber stamp $721 million in new and potentially unjustified premium hikes State Farm wants its policyholders to pay, Consumer Watchdog said this morning.  

Consumer Watchdog warned of damaging consequences for California consumers unless Commissioner Lara orders Illinois-based State Farm – the state’s largest insurance company – to reverse its action and comply with the law, as previous Commissioners have done when insurers break the law.  

“Under Proposition 103, insurance companies can’t just stop selling insurance to consumers in order to make more money for themselves – they have to open their books and get the Insurance Commissioner’s approval. Commissioner Lara has the power to order State Farm to obey the law and reverse its decision” said Harvey Rosenfield, the author of Proposition 103 and the founder of Consumer Watchdog. “If the Commissioner allows State Farm to get away with this brazen act of defiance, other companies will do the same. The result will be more artificial insurance shortages and more insurance company pressure on Insurance Commissioner Lara to rapidly approve massive rates increases without adequate scrutiny.” 

State Farm’s Unilateral Action Violates Prop 103; Insurance Commissioner Lara Has the Power to Reverse It 

Proposition 103 requires insurance companies to open their books and justify rate changes in a process open to public scrutiny; the Commissioner must approve any rate increase before it takes effect. (Insurance Code sections 1861.01(c), 1861.05.) Any change in how much a company expects to pay California homeowners for claims directly affects how much it is allowed to collect in premiums. State Farm says its decision to stop all new sales in California is intended to “improve the company’s financial strength.” But State Farm did not wait for the Commissioner to review and determine its impact on State Farm’s homeowners rates in California.  Instead, State Farm announced that its ban on new sales would go into effect the next day: on Saturday, May 27.   

The voters made the Insurance Commissioner an elected post and gave him the authority to protect Californians against excessive insurance premiums and shortages in the marketplace. Commissioner Lara has the power to order State Farm to immediately resume new sales until the Commissioner has been able to review and determine the impact on the company’s rates and profits. Additionally, the Commissioner can order State Farm to pay penalties for violating Proposition 103. (Insurance Code section 1858.1, 1859.1) Commissioner Dave Jones issued such an order in 2017 when State Farm refused to implement a rate decrease ordered by the Commissioner pending a legal challenge.   

Commissioner Lara also has emergency authority under Proposition 103 to force insurance companies doing business in California to sell insurance to those who need it anywhere in the state when there is a shortage. (Insurance Code section 1861.11.)  

State Farm’s Action Comes Despite Financial Gains in California That Exceed National Averages 

State Farm has increased its homeowners insurance rates five times in the last five years (6.9% per year from 2018 to June 2023). Claims have also been low: Between 2019 and 2021, State Farm reported it paid out an average of approximately 45 cents in claims for every premium dollar it collected – far less than the national average of 66 cents over that time period. Yet earlier this month, State Farm filed an application to increase its homeowners insurance premiums by an average of 28.1%, and its residential rental property insurance by an average of 20%. State Farm’s applications were based on continued new sales.  

Consumer Watchdog has intervened to challenge both these rate applications, alleging among other issues that State Farm is over-stating its expected losses, resulting in an inflated rate request that will raise the premiums of over 2.2 million policyholders collectively by $700 million. By creating a statewide shortage in homeowners insurance, State Farm will place more pressure on Insurance Commissioner Ricardo Lara to rapidly approve these rate increases without subjecting them to the thorough scrutiny required by Proposition 103. 

Read more about Proposition 103 here.