HomenewsreleaseCalfornia Insurance Commissioner › Judge Finds that State Farm Overcharged Consumers $85 Million, Proposes Refunds and $156 Million Rate Reduction; Final Decision From Insurance Commissioner Pending

News Release

Judge Finds that State Farm Overcharged Consumers $85 Million, Proposes Refunds and $156 Million Rate Reduction; Final Decision From Insurance Commissioner Pending

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Harvey Rosenfield & Jonathan Phenix

Santa Monica, CA -- In a major victory for 1.7 million State Farm policyholders, an administrative law judge at the California Department of Insurance has:

•    Determined that since at least July 15, 2015, State Farm’s premiums for homeowners insurance have been excessive, ordering the Company to refund policyholders at least $85 million for overcharges collected after July 15, 2015.

•    Proposed an order that going forward, State Farm must decrease its homeowners insurance rates by 7.0%. This would save policyholders nearly $156 million per year.

California Insurance Commissioner Dave Jones, who must decide whether to approve the judge’s decision, has now ordered the judge to determine the proper amount of interest consumers should be paid for any illegal amounts State Farm collected in the past.

“In 1988, California voters passed Proposition 103 to end insurer price-gouging in California,” said lead trial counsel, Todd Foreman, of the Zohar Law Firm in Los Angeles. “Today’s ruling will put millions of dollars back into the pockets of overcharged consumers, demonstrating that consumers are only protected when insurance companies are forced to open their books and justify their rates.”

Under Proposition 103, insurance companies are barred from charging excessive auto, home and business rates. Companies are required to apply for and justify any rate changes before they take effect. The measure also authorizes consumers to request hearings to challenge illegal rates and other insurance practices, as Consumer Watchdog did here. This system has saved Californians over $100 billion since it took effect in 1989, according to a 2013 report by the Consumer Federation of America.

State Farm Pleads Poverty

On December 4, 2014, State Farm requested a $73 million increase, effective July 15, 2015, in its home and rental insurance rates. After analyzing the application, Consumer Watchdog concluded that State Farm’s rate increase was unjustified and that its current rates were excessive. It filed a challenge to State Farm’s request on January 1, 2015.  

A hearing began before Administrative Law Judge John A. Larsen on November 16, 2015. In his 95 page ruling, Judge Larsen examined all of State Farm’s arguments, as well as evidence presented by experts from Consumer Watchdog and the Consumer Federation of California. State Farm argued that having to reduce its rates would violate its constitutional rights. In response, the consumer groups noted that State Farm had collected $12.22 billion in after-tax profits nationwide between 2010 and 2014 – in 2014 alone, State Farm raked in $4.6 billion in after-tax profits – and that cutting rates would impose no financial hardship. The groups also noted that State Farm had excluded about $105 million in investment returns made by the entire company and was improperly asking policyholders to make up this difference by paying higher rates. Judge Larsen agreed that State Farm’s rights were not violated and rejected State Farm’s proposal to hike rates; the judge criticized State Farm for failing to follow the rules governing excessive rates that all other insurers follow.

“Far from proving it deserved a rate increase, State Farm’s evidence showed that consumers are entitled to relief from the excessive rates they have had to pay for over a year,” said Jonathan Phenix, a staff attorney with Consumer Watchdog. “Simply citing to the Constitution when the evidence is against you, as State Farm did here, won’t carry the day when that evidence shows State Farm collects billions in profits every year.”

State Farm Tries to Hide Evidence from the Public

One of Proposition 103’s core reforms requires insurance companies to disclose to the public all the information submitted in support of an application to change their rates. Flouting this requirement, State Farm asked Judge Larsen to deviate from the formula used to calculate insurance rates and conceal from public scrutiny evidence that didn’t support State Farm’s argument. However, Judge Larsen declined to follow State Farm’s argument and found that Proposition 103’s sunshine provision guaranteed the public’s right to access to documents that support of a rate change. “[I]f cost and pricing information were required to be kept confidential as a trade secret,” Judge Larsen wrote, “little actuarial data in rate hearings would be left for the public to inspect. Such a result would undermine Proposition 103.”

“Insurance coverage is compulsory for most homeowners, so the question isn’t about whether consumers should buy insurance; it’s how much they will pay for that coverage,” said Harvey Rosenfield, the author of Proposition 103 and one of Consumer Watchdog’s lawyers in the case. “This is why the voters insisted that insurance companies and the Department of Insurance review rates in a transparent way, rather than behind closed doors like they used to. As today’s ruling recognizes, insurers must justify their rates to the public.”

State Farm’s History of Proposing Overcharges

This year alone, Consumer Watchdog has challenged two other excessive rate changes proposed by State Farm. In April, Consumer Watchdog challenged State Farm’s across-the-board rate hikes on small businesses after finding the insurer’s current rates for commercial property and liability insurance were excessive. And earlier this month, Consumer Watchdog alleged that State Farm will overcharge policyholders for insurance that covers dwellings occupied by tenants by as much as $100 million unless it cuts its current rates by up to 40%.

State Farm has a long history of proposing rates that later turned out to be unjustifiable. Since 2006, including the savings from today’s decision, Consumer Watchdog has saved California renters and homeowners with State Farm insurance more than $749 million by challenging State Farm’s excessive rate proposals.

History of State Farm’s Rate Changes in Homeowners Insurance

Year

Rate Changes Proposed (Overall)

Rate Changes Implemented (Overall)

Savings to State Farm Policyholders

         2006 

                    0%

                      -20%

             $266 million

         2011

                    0%

                    -12.6%

             $157 million

         2013

             6.9%

                      -1.2%

               $86 million

         2016

             6.9%

                      -7.0%

             $235 million

In the current proceeding involving State Farm's homeowners rates, Insurance Commissioner Dave Jones has asked that Judge Larsen consider how much interest, if any, consumers should get along with their refunds. Once Judge Larsen makes this finding, Commissioner Jones will then decide whether to approve the ruling issued by Judge Larsen. State Farm has already said it will appeal an adverse ruling.

Read the Administrative Law Judge's decision and the Commissioner's August 8, 2016 order regarding calculation of interest rates on the refunds: http://www.consumerwatchdog.org/resources/noticeofnonadoptionofpd.pdf

Read Consumer Watchdog's April 11, 2016 brief in support of rate refunds and decreases for State Farm's customers: http://www.consumerwatchdog.org/resources/4-11-16cwdopeningbriefpublic.pdf

Read more about Proposition 103: http://www.consumerwatchdog.org/focusarea/prop-103-california-insurance-reform

About Consumer Watchdog and 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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