Consumer Group Joins Probe, Calls for Refunds and Penalties for Violations of Insurance Reform Law Prop 103
Santa Monica, CA — Farmers Insurance, the state’s second largest homeowners insurance company, should be penalized for overcharging homeowners for insurance, the Foundation for Taxpayer and Consumer Rights (FTCR) said today in a legal petition filed with the California Department of Insurance. The group also said the insurer should pay refunds to any policyholder who was improperly surcharged.
In its petition, the non-profit FTCR said that public complaints indicate Farmers had violated the 1988 voter-approved initiative Proposition 103 and other California insurance laws by unfairly surcharging homeowners based on their claims history and by incorrectly classifying lower risk properties as high risk. The group invoked Proposition 103 to join an administrative complaint against the insurance company brought by the California Department of Insurance (CDI) in late July. Under Proposition 103, consumer advocates have the right to sue, or join any lawsuit or administrative proceeding, to enforce Proposition 103‘s provisions.
In response to the CDI complaint, Farmers claims that the Insurance Commissioner has no authority to stop the insurance company from overcharging homeowners. FTCR said it would intensely fight Farmers‘ attack on Proposition 103, which clearly provides the Commissioner with the power to stop such practices.
“Farmers has no right to rip off its customers, and the public must be protected against such lawlessness,” said Harvey Rosenfield, the author of Proposition 103 and a lawyer for FTCR. “Farmers‘ motto is ‘gets you back where you belong,’ but our goal is to make sure Farmers‘ policyholders get the money back that belongs to them, not Farmers.”
Farmers‘ Surcharges Violate Own Policies
According to the allegations of the complaint, Farmers‘ risk rating system, which it calls the “Property Experience Rating Plan” (PERP), determines how much policyholders are charged for insurance based upon three years of claims history. Under the PERP rules, policyholders with no claims in the previous three years are supposed to get a discount, while those with one claim will receive no decrease or increase, and those with two to four claims pay a surcharge. Farmers will non-renew homeowners with five or more claims, according to its PERP rules. Claims that are withdrawn, denied, or that fall within the deductible are not supposed to count at all; nor are claims for damage resulting from fire catastrophe, lightning, wind, hail or earthquake. But, according to complaints, the CDI has received from the public, Farmers has improperly applied its PERP rules by attempting to surcharge policyholders with no claim of any kind in the last three years. Other policyholders complained of surcharges despite the fact that their claim was withdrawn, denied, fell below the policyholder’s deductible, or was a claim for fire catastrophe, lightning, wind, hail or earthquake. Still others are improperly non-renewed. Further, according to the CDI‘s complaint, Farmers has improperly applied surcharges in some instances even when another insurer offers to pay the claim.
Additionally, a separate Farmers program assigns homes a risk factor for purposes of calculating the premium. Under the program, each homeowner is assigned a code that is primarily determined upon the home’s distance to a fire hydrant. However, according to the CDI‘s complaint, Farmers has admitted that in 20-25% of properties in urban areas in California, Farmers‘ new system fails to determine whether a home is within one thousand feet of a hydrant. The failure rate is higher in rural areas. In such cases, Farmers is supposed to investigate further, or use previously-collected data. Instead, Farmers arbitrarily assigns a higher-risk code than is warranted, resulting in a significant increase in premium.
“Farmers Insurance customers across California are paying more than they should for home insurance because the company doesn’t even follow its own rules when it comes to deciding the premium a customer will pay,” said Rosenfield.
California law requires insurers to follow their own internal rules, to offer consumers the lowest available premium and to treat similar risks the same. If Farmers‘ practices are determined to have violated California laws, it can be held liable for up to a $20,000 penalty for each single violation.
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