Court overturns homeowner's rate relief ordered for Farmers and State Farm policyholders
On November 8, 2004, a state district court ruled that a portion of the 2003 law allowing for immediate homeowners' relief was unconstitutional. The Texas Department of Insurance (TDI) disagreed with this ruling and began exploring all legal options on behalf of Farmers and State Farm policyholders, including future rate actions and legal appeals.
In August 2003, State Farm was ordered to reduce its rate by 12 percent and Farmers by 17.5 percent. This represents $243 million owed to their policyholders, not counting interest that has accrued over the past 14 months.
The court's ruling overturns the homeowners rate relief ordered for Farmers and State Farm policyholders in August 2003. These orders were issued after the companies had the opportunity to justify their current rates in a hearing before Insurance Commissioner Jose Montemayor. The ruling applies only to the immediate rate reduction provision of Senate Bill 14. The remainder of the 2003 reforms are not affected. The court's order did not dispute the underlying facts of the rate reduction ordered.
TDI continues to stand by its analysis of rates charged by Farmers and State Farm: those rates need to be reduced. TDI believes that it followed all due process procedures outlined in the law. Further, no analysis has been provided to the Department indicating that the orders would have harmed the companies.
Texas insurers financial results showing improvement
Second quarter 2004 financial results reported to TDI indicate a number of Texas homeowners insurance providers are improving their loss ratios-a result of efforts to improve underwriting and a quiet storm season during the early part of the year. The average loss ratio for homeowners insurance companies for the first two quarters of 2004 is 38 percent.
These second quarter reports present an indication of improving conditions, but are only part of the picture and can not be used to set or determine rates. The reports do not include additional expenses such as agent commissions, companies' operating expenses or the provisions for the inevitable catastrophe and natural disasters such as tornadoes, hail storms and hurricanes. These additional expenses typically add about 45 - 50 percent to an insurer's cost of doing business.
"We're optimistic about these numbers," Texas Insurance Commissioner Jose Montemayor said. "They validate the historic rate reductions we ordered last year which are beginning to be reflected in the first two quarters. While we're not out of the tropical storm season yet, we would expect Texas insurers to respond to the improving market conditions with increased competition for customers, offering better rates and more choices for most policyholders."
The improved market conditions in Texas this year represent a dramatic change from the experience of insurers in recent years when many faced huge losses from severe weather and water-claims resulting from a perceived mold crisis.
Montemayor, however, expressed a need for rational expectations.
"While the anticipated changes may not happen overnight, many of the final rate reductions are continuing to be phased in," Montemayor said. "I expect market competition to work; however, we are prepared to intervene if necessary."
In March 0f 2002 State Farm Lloyds had received approval from the Texas Department of Insurance (TDI) to begin offering substantially the same State Farm home insurance policy that is available to its customers nationwide — a policy that covers only damage from "sudden and accidental" discharges of water, not damage from slow leaks.
The "Texanized" version of State Farm's national home insurance policy will be implemented beginning with Sept. 1, 2002, renewals.
Customers of State Farm Lloyds — the Texas property insurance affiliate of State Farm Insurance Co. and the largest home insurer in the state — received notices that the "Texanized" version of State Farm's national home insurance policy will be implemented beginning with Sept. 1, 2002, renewals. State Farm will not resume selling home insurance to new customers in Texas. The insurer quit selling new home insurance policies in Texas last year due to heavy hail, mold, and wind claims.
State Farm also agreed to reduce the new product's premiums to reflect coverage differences between its national home insurance policy (called the HO-W) and the Texas standard comprehensive home insurance policy (known as the HO-B) that the insurer has sold in the past. According to State Farm, the company's average rate for a brick veneer house insured for $80,000 will drop from $1,481 for a Texas standard HO-B policy with full mold remediation coverage to $867 for the basic HO-W policy, a 41.5 percent reduction.
Ever since June 2001, when a jury awarded a Texas family $32 million in a highly publicized toxic mold lawsuit against Farmers Insurance Group, the Texas home insurance market has been in upheaval. Compounding the problem is that state law exempts insurers now writing 95 percent of the home insurance sold in Texas from any kind of rate regulation.