State Farm customers in California could soon be paying lower premiums for homeowner, condo and renter insurance but will have to wait for the outcome of a lawsuit to know whether they will also get refunds from the company.
A judge ruled late Friday that State Farm must abide by a state order to cut its premiums but can hold off on repaying customers, allegedly for overcharging, as it challenges Insurance Commissioner Dave Jones' authority to demand refunds under landmark insurance law Proposition 103.
Jones last month ordered State Farm to lower rates retroactively to July 2015, prompting a lawsuit from the Bloomington, Ill., insurer, which argued Jones cannot retroactively cut rates. The insurer had asked the judge hearing the case in San Diego County Superior Court to put the cuts and the refunds on hold until the suit is resolved.
In a decision released Saturday, Judge Katherine Bacal found that State Farm must proceed with the rate cut, saying that forcing consumers to continue to pay rates deemed excessive by the state would harm the public. But, she concluded, "There is no real harm in delaying payment of relatively small refunds, especially if policyholders would eventually be paid in full, with interest."
The refunds, which would go to about 1.7 million customers, would total about $100 million – or about $60 on average.
In a statement, Jones said he was pleased with Bacal's decision, though he said he wants to make sure customers who may be owed refunds are not lost track of during the time – perhaps years – it will take to resolve the case.
"I look forward to having my team work with the court to craft an order that requires State Farm fully identify the rate payers so that State Farm is actually able to issue rebates … when this case is concluded," he said. "I am confident that we will convince the court that excessive rates are unlawful under Proposition 103 and State Farm consumers are entitled to rebates."
State Farm spokesman Sevag Sarkissian said the company would take steps to comply with the order to reduce rates but may appeal Bacal's ruling so that it can leave rates at current levels.
"We maintain that we do not believe the commissioner's decision is lawful, and will continue taking the necessary legal steps to challenge the mandated rate reduction and rate refund," Sarkissian said in an emailed statement.
Consumer advocates and insurance industry trade groups say the dispute between Jones' office and State Farm has the potential to become a landmark case that could strengthen or weaken consumer protections enacted by Proposition 103.
The 1988 California initiative included a one-time 20 percent cut in property and casualty insurance rates and gave the insurance commissioner the authority to review and reject future rate increases.
However, the trade groups note that since the roughly $1.2 billion in refunds prompted by the initial rate cut, no commissioner has gone so far as to order retroactive rate cuts. They argue the threat of such cuts could destabilize the insurance industry.
Harvey Rosenfield, the author of Proposition 103 and founder of advocacy group Consumer Watchdog, said a reversal of Jones' order would amount to a significant weakening of the insurance law. Rosenfield argued against even a partial stay of Jones' cut-and-refund order and called State Farm's lawsuit frivolous.
"We will fight as long as it takes to make sure that State Farm repays what it owes – with interest," Rosenfield said. " At the end of the day, State Farm will pay."
The dispute goes back to late 2014, when State Farm asked for permission to raise its renters and homeowners insurance rates by 6.9 percent.
Under Proposition 103, the Department of Insurance must find that rate changes proposed by insurers are neither excessive nor inadequate to cover the cost of possible losses and leave a reasonable amount of profit. The law also allows consumer advocacy groups to oppose rate increases, call for hearings and inspect insurers' books.
Consumer Watchdog and the California Federation of Consumers sought to block State Farm's proposed increase. After more than a year of proceedings, an administrative law judge recommended earlier this year that State Farm's proposed increase be denied and went on to find that the company's existing rates were too high.
The judge said that State Farm should cut its homeowners insurance rates by 5.4 percent, condo rates by 13.8 percent and renters rates by 20.4 percent, and make those cuts retroactive to July 2015 because that is when State Farm had hoped to be able to increase rates.
Jones signed off on the judge's ruling last month.
State Farm questioned how the rate cut was calculated. When determining if rates are reasonable, the state looks at whether insurers will have enough money to cover potential insurance claims, in part by estimating premium revenue and income earned by insurer's vast investment portfolios.
In this case, State Farm has argued that the administrative law judge improperly included investment income earned by State Farm subsidiaries other than the one that writes insurance policies in California.
The company has also argued that even if its rates were too high in the past, Jones does not have the authority to reach back and cut them.
State Farm "was and is legally charging rates that were approved by the commissioner," the company wrote in its suit. "Now the commissioner wants to retroactively change a rate approval he issued."
A handful of insurance industry trade groups filed a brief with the court hearing State Farm's case supporting the company's interpretation of Jones' order as a "sudden reversal" in how Proposition 103 is interpreted.
The trade groups, including the Personal Insurance Federation of California and the Association of California Insurance Companies, supported State Farm's position that department rate increases or decreases have always only been forward-looking.
"The commissioner has issued an order that dramatically departs from long-standing practice," the trade groups wrote. "Such a momentous and sudden change stands in contrast to 26 years of consistent application of the law, and has huge repercussions for the industry."
Rosenfield, though, said taking away the state's ability to order a retroactive rate cut would give insurers an incentive to drag their feet and attempt to keep rate decisions tied up in procedural limbo.
"If a company could avoid a rate reduction by delaying a legal proceeding so that the reduction didn't take effect for years, then there would be no point to the statute," he said.
Koren writes for the California News Group, publisher of the Union-Tribune and Los Angeles Times.