State Farm Must Reduce Its Homeowners Rates By At Least 9%, Consumer Watchdog Urges Court

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Santa Monica, CA — State Farm, California’s largest homeowner insurance company, has overcharged its customers approximately $78 million –$285,000 per day – since at least July 2015, and should be required to refund that money, Consumer Watchdog said this week in a detailed brief before the Department of Insurance.  Going forward, State Farm must reduce its rates by at least 9.26%, the organization said.

State Farm is currently requesting permission to charge homeowners  $198 million per year more than what it can legally charge, according to Consumer Watchdog.  The company is seeking a $94 million increase over its current rates. But an analysis of State Farm’s financial operations under California’s insurance rules, supported by evidence introduced at the trial, confirms that the company’s current rates are excessive and illegal, and that a rate decrease of 9.26% is required, which would save policyholders $104 million annually.

State Farm’s lawyers are arguing that the company – California’s largest – can’t afford to reduce its rates and that forcing it to do so would deprive the company of its constitutional rights.

“State Farm has no constitutional right to overcharge consumers, and voters passed Proposition 103 to make sure they don’t,” said lead attorney for Consumer Watchdog in the case, Todd Foreman, of the Zohar Law Firm in Los Angeles. “State Farm is turning the law upside-down, using rules that are meant to protect consumers to justify hundreds of millions in excess profits for a very profitable insurance company.”

“The law requires State Farm to prove it needs a rate increase before it can get one,” said Jon Phenix, a staff attorney at Consumer Watchdog. “But State Farm hasn’t done that here. Instead, even though the evidence is against them, State Farm maintains that it should be allowed to keep the excess premiums it has already collected from its customers and overcharge them even more in the future.”

Consumer Watchdog is one of two citizen organizations bringing the legal challenge before the California Department of Insurance under Proposition 103, the voter-approved ballot measure. Prop 103 bars excessive home, auto and business insurance rates and it authorizes consumers to challenge illegal rates and other insurance practices. Administrative Law Judge John A. Larsen is presiding over the proceeding.

Refunds Could Exceed $104 Million

Proposition 103 requires insurance companies to keep rates at fair levels at all times. Because State Farm’s current rates are excessive, the law requires the company to pay refunds to those it has overcharged. The Insurance Commissioner has set July 15, 2015 as the effective date for calculating the refund. As of today, April 14, State Farm’s policyholders would be entitled to refunds of $78 million, Consumer Watchdog calculates. A final ruling by the judge is expected no later than August. By that time, State Farm could have to repay over $104 million.

State Farm argues that the Commissioner has no authority to order it to pay back overcharges.

State Farm Aims Legal Challenge at Rules that So Far Have Saved Consumers $100 Billion

California’s “prior approval” system requires insurance companies to comply with a formula that caps profits at fair levels; places a ceiling on the pass-through to policyholders of executive salaries and other expenses, rewarding insurers that operate efficiently; and forbids insurers from making consumers pay for lobbying, political contributions, institutional advertising, fine and penalties. This system has saved California motorists over $100 billion since it took effect in 1989, according to the Consumer Federation of America.

State Farm contends that it should be exempted from these rules, claiming that it would otherwise suffer deep financial hardship.  Yet, during the five-year period from 2010 through 2014, the company reported nation-wide net income, after taxes, of $12.22 billion– an average of $2.4 billion per year – and profited $4.6 billion in 2014, alone. Even without a rate increase, according to State Farm’s own calculations, its California affiliate will still collect $1.1 billion in premiums and earn a profit of $27 million.

State Farm has vowed to delay the rate decreases and refunds through legal appeals. “In recent years, insurance companies have been clogging state courts with unfounded legal challenges to California’s consumer protection rules,” said Harvey Rosenfield, the author of Proposition 103 and one of Consumer Watchdog’s lawyers in the case. “But State Farm has to obey the law just like all the rest of us. The longer they stall, the more they’ll have to give back.”

A final round of briefing in this rate case is due on May 11. After the Administrative Law Judge issues his ruling, it goes to Insurance Commissioner Dave Jones, who can adopt, reject or modify the decision.  The final decision is expected this summer.

For a copy of Consumer Watchdog's brief, click here:

To read more about Proposition 103, click here:

About Consumer Watchdog & the Zohar Law Firm, P.C.

Consumer Watchdog is a non-profit non-partisan organization.  It has invoked the public participation process under Proposition 103 to save auto, home and medical malpractice insurance policyholders over $3 billion since 2003.

Consumer Watchdog’s trial counsel in this proceeding are Todd Foreman and Daniel Y. Zohar of the Zohar Law Firm, P.C. in Los Angeles. The Zohar Law Firm has achieved landmark successes in prior rate hearings, saving consumers hundreds of millions of dollars, and also handles business and entertainment litigation throughout California.  

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Carmen Balber
Carmen Balber
Consumer Watchdog executive director Carmen Balber has been with the organization for nearly two decades. She spent four years directing the group’s Washington, D.C. office where she advocated for key health insurance market reforms that were ultimately enacted into law as part of the Affordable Care Act.

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