There were twenty-five lawyers in gray suits waiting in a Los Angeles Superior Court courtroom yesterday afternoon when I walked in to try to make sure that $455 million in class action settlement funds go to the Farmers policyholders who are entitled to the money, instead of being kept by the insurance company.

Harvey Rosenfield said he hadn’t seen such a big crowd of high-dollar lawyers in one courtroom since the Proposition 103 days, and that’s saying something.  About half of those lawyers were there to represent the defendants, Farmers Group, and its affiliates.

At a conservative $500 per hour per gray suit (fees for high-dollar insurance defense firms can reach $1,000/hour), that hearing easily cost $35,000 in attorneys fees.  Guess who will pick up the tab for that? Farmers' policyholders.

The case, known as Fogel v. Farmers Group, Inc., charges that Farmers required its policyholders to pay too much for a management fee that Farmers builds into its auto, home, and business insurance premiums. The company and its Swiss owner, Zurich Financial Services, earns a profit of about 50% on the fee.

Why is Farmers so eager to give away a half billion dollars that they have to send so many lawyers to stop Consumer Watchdog from blocking the settlement?  Well, its because they’re not really giving the money away.

You see, under the terms of the settlement, instead of just getting a check, class members would have to file a claim to get back an average of $22.75.  Such “claims-made” settlements are out of favor because only a very small percentage of class members ever submit claims, sometimes as low as 1%.  Here’s the kicker: the balance of the $455 million settlement fund that goes unclaimed will be given back to Farmers!  Even if 10% of consumers in the class make claims, an optimistic number, only about $45 million will be handed out to consumers, $410 million will go back to Farmers.  The plaintiff’s attorneys will walk away with $90 million in attorneys fees.

Such “claims-made reversionary” settlements that direct unclaimed settlement funds back to the defendants are really out of favor because they lead to perverse incentives: Defendants want to ensure very few claims, and plaintiff lawyers want to set their fees based on the gross amount of the settlement funds, even though the bulk of the money will never make it into pockets of consumers.

A former Farmers Insurance customer, represented by Consumer Watchdog’s attorneys, intervened in the lawsuit in February to protect the interests of consumers.  

The judge granted “preliminary approval” of the settlement yesterday.  But, the battle is far from over.  Class members may object to the settlement and can show up in court on September 7, 2011.

To learn more, click here to view our case info page.