California Consumer Group Challenges Farmers’ Attempt to Overcharge California Homeowners One-Quarter $Billion a Year

Santa Monica, CA — Farmers Insurance Company is seeking exemptions to state rules that could allow it to charge one million Californians almost $250 million extra per year for their Farmers homeowners insurance. Information provided by Farmers to the Department of Insurance indicates that its customers should receive an approximately 19.6% rate decrease, said the Foundation for Taxpayer and Consumer Rights (FTCR). In a petition filed Monday, FTCR challenged Farmers’ requested 6.9% rate increase. The rate increase request comes less than a year after then Insurance Commissioner Garamendi ordered Farmers to decrease prices by about 18%.

In its public filing the company seeks a rate hike of 6.9%, even though Farmers indicates that state regulations would require the company to decrease its rates by 19.6%, or about $180 million statewide. The company wants Insurance Commissioner Steve Poizner to grant three variances to the rules limiting excessive insurance premiums that would allow Farmers a 6.9% rate increase instead. All told, Farmers is requesting a rate that would overcharge its homeowners customers approximately $230 each, per year.

Among the exceptions the company seeks, Farmers wants $120 million in excess premiums for its alleged "superior customer service." The company cites two different JD Power and Associates surveys that show the company’s customer satisfaction ranking went from below average to slightly above average between 2003 and 2006*. Company executives claim the nation’s third largest insurer should be compensated for the work it did to improve service. But the 2007 JD Power rankings (apparently released just after the company filed its request) finds Farmers with a score 20 points below the industry average and the third worst among 20 major insurers.

"It’s ridiculous for Farmers to argue that customers should pay extra just to get good customer service. The request is even more outrageous because Farmers doesn’t even pass its own test for excellence," said Carmen Balber, consumer advocate with FTCR. "Any company that really deserves consideration for quality customer service isn’t likely to ask for a rate hike, because they wouldn’t charge policyholders more for treating them right in the first place."

FTCR’s petition was filed under the rules of voter-approved Proposition 103, which requires insurance companies to justify rate changes prior to imposing increases, and allows consumer groups like FTCR to challenge excessive rates and request public hearings.

Farmers is one of a handful of homeowners insurers, including Allstate and Fireman’s Fund, that are seeking exceptions to the regulatory formula that prevent excessive rates under Proposition 103. The vast majority of filings, however, seek no exceptions — strong evidence that the rules approved last year are working. In a recent letter to the Department of Insurance, FTCR suggested that the state should establish objective criteria to evaluate such variance requests, including an independent mechanism for judging quality of customer service to determine if any company’s is so exceptional as to warrant a higher rate.

Attempting to bolster its claim for a customer service exception, the insurer also argues that policyholders should pay more because it pays its agents higher commissions than their peers, but does not illustrate how that compensation is connected to improved customer satisfaction.

Farmers also points to its employee training program, dubbed "University of Farmers," as a customer service enhancement, but backs it up with no evidence or even a curriculum.

"This company even wants customers to pay more for their staff training meetings. For all we know, Farmers U could be teaching employees to deny every claim immediately and wait to see who complains," said Balber. "Farmers drew up a laundry list of regular business expenses — costs that consumers are already paying for — and is trying to pass them off for a second time as customer service triumphs."

Farmers seeks two additional variances worth approximately $125 million to the company. One would reward the company for its investment in underserved communities, although the insurer has not even verified its investments are in communities that the Commissioner deems underserved. The other is an attempt by Farmers to increase premiums in response to a law passed in the wake of the 2003 wildfires clarifying that the cost of labor does not depreciate for purposes of determining the payment to a policyholder rebuilding a home.

Click here to download FTCR’s request for hearing on Farmers’ proposed rate increase.

Click here to download Farmers’ rate increase request.

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* In 2003, Farmers scored 751 out of 1000, well below the industry average of 777. In 2006, Farmers scored 765, four points above the industry average of 761.