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Texas sues Farmers Insurance for price gouging

Texas is suing Farmers Insurance Group Inc. for "deceptive, misleading, and discriminatory homeowners insurance practices," according to Texas Gov. Rick Perry and Texas Attorney General John Cornyn. The lawsuit, filed by Cornyn's office on Aug. 5, 2002, accuses Farmers of jacking up premiums by claiming it is losing money when it is actually turning a profit.

The lawsuit also alleges that Farmers is improperly charging Texas homeowners for catastrophic insurance losses in other states.

"Other insurance carriers in Texas would be wise to sit up and take notice."

At the heart of the lawsuit is an allegation that Farmers charges a "management fee" of 12 to 13 percent on collected premiums, so that when Texas policyholders pay their home insurance bills, the insurer collects extra profit. According to the lawsuit, Farmers reported a fiscal year 2001 after-tax profit of $438.7 million from these management services alone — without disclosing the terms of the management-fee agreement to its Texas policyholders.

Perry says the lawsuit against Farmers seeks refunds of excessive and unfair rates to Texas homeowners, as well as civil penalties. According to Cornyn, those penalties amount to $10,000 per violation and $25,000 per Texan harmed by any of Farmers business practices. Civil penalties could range in the millions of dollars, with the estimated refund to policyholders reaching as high as $140 million.

Among the deceptive practices alleged in the lawsuit:

  • Farmers has charged Texas policyholders for natural disasters occurring in other states, resulting in a premium increase to virtually all Texas policyholders.
  • Farmers has used credit history as a significant factor in setting premiums, without disclosing to its policyholders the adverse impact of doing so.
  • Farmers has discriminated against groups of homeowners in some regions of the state by switching all of its policyholders to policies that limit coverage for water damage. While such a move should impact Texas policyholders differently depending on where they live, Farmers has applied the same formula to all of Texas in calculating the change in value of each policy.

"We allege that Farmers Insurance has been deceptive and discriminatory, and they have hit Texas consumers in the two places they are most sensitive and should be secure: in their pocketbooks and in their homes," says Cornyn.

Farmers has reviewed the allegations and says the lawsuit is without merit. "This looks and feels like political harassment," says spokesperson John Hageman. "Given the political season, we should not be surprised to find ourselves being used as a political football. It is still shocking, however, because . . . 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."

According to Hageman, Farmers lost approximately half a billion dollars in Texas in 2001. "For every dollar we receive in insurance premiums, we currently pay out more than $2.57 in losses and expenses," he says. "Nationwide, less than 20 percent of our premiums come from Texas, yet more than 40 percent of our losses come from this state."

Hopping mad homeowners

Texas consumers are madder then heck about their exorbitant home insurance premiums, the highest in the nation. Premiums have risen more than 200 percent in some parts of the state, particularly those regions hard hit by rising mold claims. See Texans complaining early and often about home insurance.

Mad as heck and not going take it anymore

Read New consumer coalition accuses insurance industry of price gouging.

In response to their complaints, Perry ordered Cornyn and the Texas Department of Insurance to investigate the underwriting practices of the state's top three home insurers — Allstate Insurance Co., Farmers, and State Farm Insurance Co. While the investigations are still ongoing, the initial findings "reflect that at least one company — Farmers Insurance — has engaged in unfair, discriminatory practices to charge consumers excessive and unjustified rates," according to Perry, who warns he is "committed to ending unscrupulous corporate actions."

The lawsuit sends a clear message that deceptive business practices will not be tolerated, says Perry. "Other insurance carriers in Texas would be wise to sit up and take notice."

State Farm says it does not comment on litigation involving its competitors. Allstate says it is evaluating the situation.

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