Consumer Group Calls on Insurance Commissioner to Expand Investigation, Issue New Rules

Santa Monica, CA — Farmers Insurance will pay refunds and a $2 million fine for improperly using policyholders’ claims history to raise the rates or cancel policies of some homeowners, under a settlement between Farmers, the California Department of Insurance and the Foundation for Taxpayer and Consumer Rights (FTCR) announced late Wednesday. The settlement, which required Farmers to issue at least $1.4 million in refunds and change its practices, is the result of legal action brought by the Department of Insurance in 2003 against Farmers for practices that have become known as “use it and lose it.” Farmers is the second largest home insurer in California. Read the final settlement here.

In 2005, the non-profit FTCR intervened in the action to ensure that Farmers paid refunds to cheated customers and changed its practices. Farmers initially argued that the Insurance Commissioner had no authority to stop the insurance company from overcharging homeowners under voter-approved Proposition 103, which mandated rate protections for policyholders. Farmers lost that argument and, facing massive penalties, subsequently agreed to settle.

FTCR is urging all Farmers homeowners insurance customers to review their premiums from 2003 – 2007 and contact the group by e-mail at: [email protected].
FTCR said policyholders who faced unexplained rate hikes or believe they were inappropriately denied renewal by Farmers may be due a refund.

“Farmers was overcharging its customers and California law gives the Insurance Commissioner and citizens the power to enforce the rules and get people their money back,” said FTCR’s litigation director Pam Pressley. “Farmers is not only refunding money to policyholders and paying a fine, it is changing its practices so homeowners are protected from these abuses in the future.”

Joining FTCR’s insurance and legal experts in this action were Mark A. Chavez and Jon Gertler from the Mill Valley, CA firm of Chavez & Gertler LLP and attorney Kim E. Card. Farmers‘ improper practices and the changes resulting from the settlement are detailed at the end of this news release.

Insurance Commissioner Should Enact Broad Regulations to Stop Insurers’ “Use It and Lose It” Schemes

Consumer advocates with FTCR said that Insurance Commissioner Poizner should now begin the process of enacting broader regulations of insurance company rating practices. Poizner has said that ending insurance company practices of punishing customers simply for filing legitimate claims would be a top priority of his administration. Under Proposition 103, the Insurance Commissioner has broad authority to enact rules to protect consumers from unfair rating practices, as was demonstrated by the settlement with Farmers.

“The Insurance Commissioner has stopped Farmers Insurance from ripping off customers, but what about the rest of the industry? He should turn his attention to prohibiting the various ‘use it and lose it’ schemes that are employed by many other insurers and are ripping tens of millions of dollars out of the pockets of California consumers,” said Proposition 103 author and FTCR founder Harvey Rosenfield.

FTCR also noted that this is not the first time Farmers has violated the law. It has been sued for surcharging motorists in violation of another of Proposition 103‘s protections. The company is also being sued for charging excessive and unlawful fees for its policyholders, including fees in connection with paying for auto insurance on an installment basis. In 2006, FTCR challenged Farmers‘ homeowners insurance rates and helped to secure a $171 million decrease in rates for California customers by demonstrating that the existing rates were excessive. In 2004, FTCR blocked Farmers from imposing an illegal $94 million rate hike.

Details of the Settlement

According to FTCR and the allegations of the Department’s enforcement action, Farmers had been indiscriminately applying its own internal rating guidelines, resulting in unfair surcharges or non-renewals to some customers who:

– Made claims that were never paid by Farmers because they fell within the policyholder’s deductible, were paid by another insurer, or were withdrawn or denied altogether;
– Had losses from one event counted as more than one claim;
– Had a claim for damage due to a fire catastrophe, wind, hail, lightening or earthquake that were not supposed to impact customers rates under Farmers‘ guidelines; and
– Lived at an address for which Farmers failed to obtain accurate information to determine how close the property was to a fire hydrant

In addition to the refunds to policyholders and the monetary penalty, the settlement requires that Farmers must:

– Develop objective, specific rating and renewal guidelines that comply with the Insurance Code and the Insurance Commissioner‘s regulations;
– Maintain, and agree to provide the Department of Insurance with detailed documentation in Farmers‘ files to justify any decision to non-renew a policyholder;
– Conduct an analysis of Farmers‘ computer data to find and refund any policyholders who were incorrectly surcharged due to (1) claims without payment, or inquiries made that never resulted in a claim or payment, and (2) losses from a single event being treated by Farmers as two or more claims.

– Be subject to a rating and underwriting exam by the Department of Insurance in early 2008 regarding whether Farmers is administering its rating practices accurately and consistently with its rules as filed with the Department such that policyholders are being charged accurately according to their claims history.

Read the Department of Insurance‘s original “Notice of Noncompliance”.

Read FTCR’s petition to intervene.

Read the final settlement.

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The Foundation for Taxpayer and Consumer Rights (FTCR) is the state’s leading consumer watchdog group. For more information, visit us on the web at: www.ConsumerWatchdog.org.