State, Farmers reach settlement

Insurer to stay in Texas after agreeing to lower rates, pay refunds

                  12/01/2002

                  By TERRENCE STUTZ / The Dallas Morning News

                  AUSTIN - Farmers Insurance Group and state officials reached a settlement Saturday that will allow the state's second-largest homeowners insurer to remain  in Texas as long as it lowers rates 6.8 percent and refunds about $65 million in overcharges.

                  The agreement ended a lengthy legal dispute between Farmers and the state that had prompted the company to announce in September that it was pulling out of Texas and leaving its 700,000 customers to search for new homeowners policies.

                  There were no fines or penalties in the settlement - reached after weeks of  negotiations - even though state regulators had accused Farmers of illegal pricing practices and other violations of state law.

                  Farmers executives praised the agreement at a news conference Saturday, insisting that their No. 1 goal had been to remain in Texas, one of their largest markets.

                  They also refused to concede that the company had done anything improper or illegal, even though the company will pay refunds of about $65 million for allegedly overcharging customers.

                  That amount was less than half what state officials had originally sought.

                  "We've not done anything wrong," said Mark Toohey, a California-based executive of Farmers. "This agreement says nothing about illegal practices." As proof, he pointed to the lack of any fines in the settlement.

                  The 6.8 percent rate reduction, which will cover policies renewed from Jan. 1 to Sept. 1, 2003, will represent about $35 million in savings to Farmers customers, according to the Texas Department of Insurance.

                  Praise from Perry

                  Gov. Rick Perry, who feuded with the company and accused it of "ripping off"  customers during his election campaign this year, praised Farmers for ending the legal dispute.

                  "I commend Farmers for settling these legal matters, and I welcome the company's continued business in the state," the governor said in a prepared statement.

                  "Although Farmers admits to no wrongdoing as part of the settlement, I believe the state's complaints were valid."

                  Farmers had blamed its legal troubles on election-year politics and Mr. Perry, who was under fire from his Democratic opponent in the governor's race for not controlling runaway homeowners insurance premiums.

                  But Mr. Toohey decided not to resurrect those claims.

                  Instead, he said, the company is focused on the future and is encouraged that its losses in Texas are trending down. That is what allowed Farmers to agree to lower its rates, he said.

                  Farmers, like most insurance companies, has been reeling this year following massive losses in Texas related to water and mold damage claims.

                  Those losses have led to record premium increases as many homeowners have seen their rates double.

                  Deal criticized

                  A leading consumer group blasted the settlement on Saturday, calling it nothing more than a "slap on the wrist" for Farmers because the company will pay no fines and will get to keep $85 million in overcharges that were identified by the state.

                  "This is absolutely a great deal for Farmers," said D.J. Powers of the Center for Economic Justice, an organization that represents low-income insurance consumers.

                  "Some of the Texas Department of Insurance's own documents showed rate increases of up to 190 percent by Farmers, but they are only having to lower rates 6.8 percent. That's ridiculous on its face."

                  However, state Insurance Commissioner Jose Montemayor described the settlement - including the refunds and reduced rates - as the largest property insurance agreement in state history.

                  "This agreement is good news for consumers and will have a positive impact on the Texas homeowners market," said Mr. Montemayor, an appointee of Mr. Perry. "I believe that this agreement will begin a new, positive relationship between TDI and Farmers Insurance."

                  Under the settlement, Farmers customers will receive their refunds either as a credit when their policies are renewed or as cash if they choose not to remain with Farmers.

                  Company officials said individual refunds will vary, depending on several factors. As a rough estimate, $65 million would translate to just under $100 per customer.

                  The $65 million in refunds stems from excessive management fees levied by Farmers, improper use of "credit scoring" in calculating rates and unfair treatment of older homes in figuring premium discounts. Credit scoring is a system that uses a consumer's credit history to determine what level of premium should be paid.

                 D-FW policyholders

                  About a quarter of Farmers' 700,000 Texas customers live in the Dallas-Fort Worth area. All of those policyholders had already received at least one notice that their coverage would not be renewed in the next 12 months.

                  Farmers also sells auto and life insurance policies in the state.

                  While Farmers will renew homeowners policies of existing customers, it will continue to turn away new customers. The state's largest insurer, State Farm, also is declining new business.

                  The settlement was reached after lengthy negotiations between Farmers and representatives of the insurance department and the attorney general's office.

                  Attorney General John Cornyn said the agreement will uphold the state's high standards for insurer conduct as well as make consumers "whole" for the excessive rates they were charged.

                 Proposed reforms

                  Now that the Farmers dispute is over, Mr. Perry said, state leaders can focus on proposed insurance reforms that are expected to dominate the 2003 legislative session. Most of the attention will be on Texas' homeowners rates, which are the highest in the nation.

                  Farmers and other insurance companies are gearing up to fight many of the proposals and influence whatever legislation emerges from the session.

                  Generally, the industry is opposed to the tougher regulation that was espoused by several nominees for statewide office as well as numerous candidates running for the Legislature this year. Consumer groups, on the other hand, are seeking new regulations that would provide greater state oversight of rates.

                  E-mail tstutz@dallasnews.com

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