By Bob Egelko, San Francisco Chronicle

November 3, 2021

A state appeals court says California's insurance commissioner wrongly ordered State Farm to cut homeowners' rates by 7% in 2016 and should not have told the company to pay $100 million in refunds to its policyholders.

The ruling by the Fourth District Court of Appeal in San Diego does not affect the current rates of California's largest homeowners' insurer, which covered 20% of the state's policyholders when the rate reduction was ordered. But a consumer advocate said the decision, if it stands, will deprive the state's motorists of billions of dollars in potential refunds of auto insurance rates that were not lowered last year while cars remained in driveways because of the coronavirus pandemic.

"The Court of Appeal's decision has stripped the Insurance Commissioner of the powers the voters gave him to protect Californians against excessive rates," said Harvey Rosenfield, founder of Consumer Watchdog and author of Proposition 103, the 1988 initiative that established insurance rate regulation in California under the direction of an elected commissioner.

Then-Insurance Commissioner Dave Jones found in 2016 that State Farm's rates for homeowners were 6.6% too high, based on the company's expenses and investment income, and ordered about $100 million in refunds for premiums paid over 17 months. The company has withheld the refunds while it challenged the decision, while following Jones' order to reduce its future rates by 7%.

In a 3-0 ruling Friday, the appeals court said insurers are entitled to rely on rates previously set by the commissioner and cannot be required to pay refunds if those rates are later deemed to be excessive. State Farm "was required and entitled to charge the approved rate, until a different rate was approved," said Justice Richard Huffman.

The court also said Jones had failed to justify the 7% rate reduction he ordered from November 2016 until May 2018, when he granted State Farm an increase in homeowners' rates. Under state law, insurance rates weigh a company's income from its premiums and investments against its expenses and payments to policyholders.

Jones said State Farm's California-based homeowner's company, which had requested a 6.4% rate increase in 2015, was understating its income by failing to include investment sums available from the Illinois-based parent company's auto insurer and other affiliates.

But the court said the commissioner could not rely on "speculation" that the affiliates shared their investment income, and could consider only the income of the homeowner's insurer, State Farm General, which did not justify a rate reduction.

Prop. 103 "bars both excessive and inadequate rates," Huffman said, rejecting arguments by the state and Consumer Watchdog that any questions about the meaning of the 1988 initiative should be resolved in favor of consumers.

The ruling does not mean, however, that State Farm can bill its customers for the money it lost from the rate reduction. "An insurer is never permitted to recoup past losses in future rates," which are based on "forward-looking estimates of anticipated losses and expenses," said Michael Seller, spokesperson for current Insurance Commissioner Ricardo Lara.

He said Lara's office was reviewing the ruling, which it could appeal to the state Supreme Court, but would work "to prevent State Farm from enacting corporate investment policies that could result in increased insurance premiums for California consumers."

State Farm said it was pleased with the ruling.

Rosenfield said Consumer Watchdog, also a party to the case, would seek review in the state's high court.