Texas Governor Rick Perry and Attorney General John Cornyn announced that his office filed suit against Farmers Group Inc., the state’s second largest homeowners insurer, Aug. 5 for allegedly charging unnecessarily high rates for homeowners coverage, and for deceptive and discriminatory practices, which Cornyn charges violate both the Texas Insurance Code and the Deceptive Trade Practices Act. Farmers and its subsidiaries Farmers Underwriters Association, Farmers Insurance Exchange, and Fire Insurance Exchange are all named as defendants.
According to the Associated Press, the lawsuit charges that Farmers has reduced homeowners coverage and increased consumers’ premiums, and is intended to refund as much as $140 million to policyholders. The lawsuit also contends that Farmers’ filings with the SEC show that the company isn’t losing money, despite its frequent assertions to the contrary. Specifically, the lawsuit claims that SEC documents show the company making management fees of between 12 and 13 percent of collected premiums for administering insurance exchanges. To that end, after-tax profits Farmers made in management fees per policy on higher premiums in 2001 totaled $438.7 million.
The attorney general claims to have evidence that the carrier charged Texas policyholders to cover losses in other states, and that it did not notify them in writing that their credit histories would affect premium rates and renewals.
Furthermore, the Texas Department of Insurance (TDI) found that Famers’ use of homes’ ages to determine rates constituted illegal discrimination, and that the company is issuing greater discounts to newer homes and smaller ones to older homes despite similar loss histories. For example, policyholders with six-year- old homes receive 20 percent discounts, while those with seven-year-old homes receive only 15 percent discounts.
The lawsuit seeks to prohibit Farmers from not disclosing its use of both Texas- based and national catastrophe loads to determine premium rates in the state. It also seeks to keep Farmers from using risk assessment in what it calls an illegally discriminatory manner, and from using homes’ ages to determine policy rates and renewals in an illegally discriminatory manner. Furthermore, the lawsuit would prohibit Farmers from not letting consumers know that their credit histories are used to help determine their policy rates.
The lawsuit aims to refund all excessive premium payments to policyholders. It would also levy civil penalties against Farmers of up to $10,000 per violation of the Texas Insurance Code, as well as civil penalties of $25,000 per policyholder affected by the company’s actions.
Cornyn noted that the lawsuit resulted from an investigation by the Attorney General’s Consumer Protection Division and an examination by the Texas Department of Insurance.
Farmers responded by denying any violation of Texas laws. John Hageman, executive officer of the company’s Texas operations, characterized the lawsuit as a form of “political harassment,” noting a looming fall election in the state. Hageman also claimed that Farmers had lost $390 million through May 2002 due to homeowners claims. In a written statement, Hageman noted, “Farmers is the only major carrier that is still broadly open to the customers of Texas. We have done so at tremendous losses to our company. For instance, our losses in the homeowners market through May of this year are $390 million. Last year, we lost approximately half a billion dollars in this market. For every dollar we receive in insurance premiums, we currently pay out more than $2.57 in losses and expenses. Nationwide, less than 20 percent of our premiums come from Texas, yet more than 40 percent of our losses come from this state.”
Another Farmers spokes-man, Bill Miller, claims the company lost $500 million in the Texas homeowners market last year.
Perry is up for reelection in the fall, and Cornyn is running for the U.S. Senate.
The company states it will remain in the Texas market, regardless of the lawsuit, which it expects will be dismissed. Farmers announced a moratorium on new homeowners policies last summer, followed soon after by State Farm and Allstate.
Topics Lawsuits Texas Agribusiness Homeowners
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