The class-action settlement will result in rebates for Farmers Insurance Group policyholders who were allegedly overcharged. But the insurer's own business units get to keep any money unclaimed by affected customers, who must fill out a 10-page claim form.

Here's how to make a $455-million consumer class-action settlement disappear.

First, require the aggrieved customers to sign and mail in a claim form comprising 10 pages of legal Esperanto before receiving any money. Make sure the customers know they're signing "under penalty of perjury."

Second, let the company keep any money that isn't paid out.

At least, that's how the huge settlement reached in a case involving Farmers Insurance Group works out, in the opinion of Santa Monica-based Consumer Watchdog.

The case, which percolated in Los Angeles Superior Court for about seven years before the settlement was reached in October, involves allegations that Farmers, as a parent company, charged excessive administrative fees to its own insurance units.

The effect, according to the plaintiffs, was to overcharge customers who bought residential or commercial insurance from the units, which are known as "exchanges" and are technically owned by the policyholders.

This was no penny-ante deal. More than 13 million customers may have been overcharged on fees that totaled $9 billion from 1999 through the end of last year. Farmers maintains that the allegations were baseless, but it settled to put the case behind it and to avoid the risks and costs of litigation. Thomas V. Girardi, the lead plaintiffs' lawyer, says the settlement will keep Farmers on the straight and narrow in the future.

The settlement calls for Farmers to send claim forms to customers in the affected class, who would be entitled to rebates averaging about $35. Any unclaimed money would go to the exchanges. Girardi and other attorneys who brought the case also are in line for up to $90 million in fees.

According to the preliminary approval issued by Los Angeles Judge William F. Highberger earlier this month, claim forms should reach customers by mid-June. The court will hold a hearing Sept. 7 to decide whether the response warrants his giving the deal a final OK.

The view of Consumer Watchdog, which has been monitoring the case for years, is that there there's some sleight of hand in the settlement. The group contends the exchanges are just Farmers by another name. Consumer Watchdog's founder, Harvey Rosenfield, says that means Farmers would end up keeping any money not paid directly to customers.

"Ordinarily, you wouldn't want to settle a lawsuit with the defendant keeping the money that isn't claimed," Rosenfield told me.

Farmers disputes his contention, saying it holds no "ownership interest" in the exchanges but merely manages "certain operations" of the exchanges on behalf of customers.

Girardi agrees. The point of the case was precisely to get the money from Farmers back to the exchanges and their customers, he says. Because the exchanges' rates are regulated by the state department of insurance, any money returned to them should show up, if indirectly, as lower insurance rates for Farmers customers.

Rosenfeld also contends the claim form is little more than a device to discourage customers from making claims. If he's right on that count, it would be the latest wrinkle in a long tradition.

The yield from consumer class-action cases has always seemed a bit of a mismatch, with the average class member — say the buyer of a short-weighted brand of detergent or an automotive lemon — getting an award worth a few bucks while the attorneys recover seven or eight figures in fees and expenses and the defendants paying back only a fraction of what they may have gained from their misdeeds.

For years, the preferred corporate subterfuge was the "coupon settlement," in which consumers would get a voucher entitling them to a few bucks' discount if they made a new purchase from the same defendant. The percentage of customers who opted to buy a new product from a company already accused of ripping them off was so low it made the response rate on direct-mail solicitations look lavish.

Consider the outcome of a 2001 lawsuit filed against Mercury Insurance, alleging that it illegally denied as many as 1 million policyholders good-driver discounts they were entitled to, at an average cost of about $77. Mercury eventually agreed to send affected customers vouchers providing a discount of $25 or $45 on new or renewal policies.

Mercury later reported that of the estimated 1 million customers, only about 60,000 redeemed their chits, at a cost to Mercury of less than $1.9 million (To the extent the final payout falls below $5 million, Mercury is required to remit the difference to charity.).

Such outcomes gave coupon settlements a bad odor, and today many judges are loath to approve them. So class-action litigants have shifted to "claims made" arrangements such as the Farmers deal.

This case has some unusual features. One is that it's hard to distinguish the plaintiffs from the defendants. The Farmers insurance exchanges are technically co-ops owned by its policy holders. Their business is managed by the parent, Farmers Insurance Group, itself a subsidiary of Zurich Financial Services. But plainly this isn't an arms-length relationship. Among other clues to the interrelationship, according to documents filed in the case, Farmers Group's chairman, Paul Hopkins, serves as a top executive of several of the exchanges, which share a Wilshire Boulevard address with Farmers Group.

Rosenfield maintains that the distinction between the exchanges and Farmers Group is fiction. He contends that nothing in the settlement requires the exchanges to use the money they end up with to benefit policyholders directly by lowering rates (Girardi says that will be the insurance commissioner's task.). Rosenfield is convinced that Farmers will have an incentive to discourage customers from filing claims, say by requiring them to read through a long and complicated claim form.

What about that form? In a court filing, Girardi called it "simple and inoffensive," requiring only a signature for the customer to get paid. I'd argue that no 10-page document written by lawyers can ever be strictly "inoffensive," much less "simple" (not that there's anything wrong with that). This one brims with legal terms and bold-faced cautions sufficient to try the recipient's patience, at a minimum. Girardi says the settlement team's outreach to customers will be aggressive, so he expects more than 50% of the customers to sign up and get their money.

Will that happen? This settlement is shaping up as a test of whether a multimillion-dollar class-action settlement can actually be worth the paper it's printed on.

Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at [email protected], read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.

———————-

To learn more, click here to view our case info page.