SAN DIEGO (CN) – Insurance giant State Farm is going toe-to-toe with the state of California, saying the state insurance commissioner is illegally forcing them to pay customers a nearly $100 million refund while also “coercing” them to roll back rates.
State Farm General Insurance Company sued the California Department of Insurance in San Diego Superior Court, saying the state misread statutes when it recently forced the insurance company to refund more than $100 million to its customers, while simultaneously forcing a reduction in its homeowner’s insurance rates.
“The commissioner’s standard is completely divorced from the actual constitutional standard that the entity issuing the policies must have an opportunity to earn a fair rate of return,” State Farm group said in its complaint, filed on November 23.
The dispute stems from a November 7 decision handed down by the insurance department, saying State Farm was shortchanging its customers by forcing them to pay rates that only took the insurance giant’s California subsidiary into account, and not the entire insurance corporation.
Specifically, California Insurance Commissioner Dave Jones ordered State Farm to return $104 million to homeowners and reduce rates going forward.
About 1.7 million homeowners are slated to receive refunds in California.
Consumer watchdogs hailed the decision at the time.
“This is a big win for California policyholders whom State Farm overcharged,” Consumer Federation of California executive direct Richard Holober said. “It demonstrates the effectiveness of our voter-approved insurance law to keep rates fair and hold insurers accountable.”
However, State Farm says the decision is illegal and asked a state court judge to set it aside.
In December 2014, State Farm went before the insurance department to request the right to raise homeowner’s insurance rates on its California customers exclusively. State Farm has a subsidiary in California, which is kept separate from the parent company and other affiliates because of the unique insurance environment in California.
In the Golden State, catastrophic events such as earthquakes or wildfires can significantly impact the cash flow of insurance companies, which may be forced to provide large sums to many policyholders at the same time due to the frequency of these events.
Therefore, State Farm’s California branch keeps all its money in bonds, since they’re more liquid and lack the volatility of the stock market. The parent company and other affiliates across the nation do invest in stocks, since they don’t require the same liquidity as the California subsidiary.
“Generally, stocks are riskier assets subject to market fluctuations,” State Farm said in its complaint. “It is common for property/casualty insurers to avoid market risk in light of the insurance risk that is supported by the insurer’s investments.”
When the insurance department handed down its decision this past month, it said State Farm must calculate its parent company’s large stock portfolio in its overall financial pictures. The insurance company says statute does not provide for the state’s interpretation.
“In the guise of rate regulation, the California Insurance Commissioner cannot coerce affiliates in an Illinois insurance holding company system to “transfer assets” to a different affiliate in that holding company system, in order to support California rates,” the company says.
According to the insurer, the department created a “fictional portfolio” of stock for the California subsidiary, thereby adding an equally fictional $100 million in worth to the company.
The department declined to comment on the lawsuit, saying it does not comment on ongoing litigation.
State Farm not only says the insurance department erred when it created a fictional stock portfolio for the company, but that its retroactive penalty doesn’t hold water when it comes to state law.
“In addition to ordering a 7 percent rate decrease based on the offset-to-rate need from $100 million of phantom investment income from a fictional investment portfolio, the Nov. 7, 2016, decision sets a retroactive effective date of July 15, 2015, ordering State Farm to pay refunds to accomplish this retroactive rate decrease,” the insurer says in its complaint. “This exercise is outside the commissioner’s powers.”
The decision and the ensuing lawsuit is being closed watched by those in the insurance industry, as companies are worried that retroactive refunds of this nature could hinder their real-time decision-making ability, according to those familiar with the case.
Finally, State Farm says it didn’t get a fair hearing, as some of the disclosure rules for the decision hearing required State Farm to divulge trade secrets, serving as a de facto deterrent for companies that want to file grievances but don’t want to make proprietary information available.
A second lawsuit, filed in San Diego Superior Court on Nov. 28, hinges on the disclosure rules for rate hearings and says the department’s attempt to force State Farm to produce sensitive documents for public hearings runs contrary to statute.
“It stands to reason that an insurer should not have to make public its most proprietary information in order to request and prove up its right to an adequate rate,” State Farm says in the more recent complaint.
State Farm says disclosure laws and other aspects of the hearings are institutionalized to “designed to discourage any insurer from seeking the hearing to which the insurer is entitled.”
State Farm is represented by a team of attorneys led by Vanessa Wells at Hogan Lovells and Theodore Butrous at Gibson, Dunn & Crutcher.