By Frank Klimko, BestWeek

November 3, 2021

A California appeals court ruled in favor of State Farm General Insurance Co., rejecting the authority of the state insurance commissioner in ordering the carrier to reduce dwelling insurance rates by 7% that could have meant refunds of $100 million.

A three-judge panel of the California Court of Appeal, Fourth Appellate District-Division One, ruled against the 2017 rate setting order by then-Insurance Commissioner Dave Jones. The court found a 1988 law  Proposition 103 which required insurers to apply for and justify rate changes to automobile, homeowners and business insurance  was intended to protect both consumers and insurers.

"Proposition 103's focus on fairness to both consumers and insurers is reflected in itself, which bars both excessive and inadequate rates," the court said.

The court found the insurance commissioner had improperly included income from the State Farm group  rather than just the State Farm General entity which is California-specific for non-automobile lines  when calculating and setting the rates for 2017.

In November 2016, Jones ordered State Farm to reduce homeowners insurance rates by 5.37% on average, to cut renters insurance by 20.39% on average and cut condominium insurance rates by 13.81%  a 7% overall dwelling insurance reduction. State Farm originally sought a 6.9% increase (BestWire, Dec. 19, 2016).

The order also required refunds of more than $100 million in excessive rates collected since July 15, 2015 (BestWire, Nov. 8, 2016).

The appeals court found no statutory basis or legal authority for Jones' refund order.

"The prior approval system requires insurers to charge prior approved rates, pending approval of new ones, so there is no comparable role for refunds," it said. "Nor do the regulations applicable to the prior approval system address refunds, in contrast to the rollback regulations."

Consumer Watchdog, an advocacy group, which intervened on the side of the insurance commissioner, said it intends to appeal to the California Supreme Court.

"Californians passed Proposition 103 to protect themselves against arbitrary rates and discriminatory practices by requiring insurance companies to keep rates and premiums fair at all times or else be held accountable by the insurance commissioner or in the courts," said Harvey Rosenfield, the author of Proposition 103, in a statement. "The court of appeal's decision has stripped the insurance commissioner of the powers the voters gave him to protect Californians against excessive rates."

Current state Insurance Commissioner Ricardo Lara issued a statement that his office was evaluating the decision.

"The appellate court's decision is specific to State Farm, and the Department of Insurance is seeking in this case to prevent State Farm from manipulating its corporate investment policies in order to increase insurance premiums for California consumers," it said.

Attempts to reach State Farm for comment were unsuccessful.

State Farm General Insurance Co. has a current Best's Financial Strength Rating of A (Excellent).