Farmers Insurance asks court to block state review of auto rates and a possible refund order

Farmers Insurance has asked a court to block a state review of its auto insurance rates dating to 2008, making it the latest case to test the limits of California’s landmark insurance law, Proposition 103.

The Woodland Hills firm, a unit of Swiss multinational Zurich Insurance Group, argued in a lawsuit last week that a plan by the Department of Insurance to review the rates — which are being challenged by a group of consumers in a separate case — is “unlawful under applicable law and current facts” and should be called off.

The company, in documents filed Aug. 18 in Los Angeles Superior Court, suggested that if the department reviews rates approved nearly a decade ago and seeks to force Farmers to pay fines or refunds, it would be an overly broad interpretation of Proposition 103, which insurers have argued regulates rates only going forward.

California Insurance Commissioner Dave Jones dismissed any notion that his department does not have authority to investigate the 2008 rates.

“We will defend against any lawsuit challenging the right of the insurance commissioner to seek information necessary to determine if an insurer has set rates that violate the law,” he said in a statement.

Farmers spokesman Luis Sahagun said the company would not comment on pending litigation.

The issue of rate reviews, retroactive rate cuts and refunds came to the fore late last year when Jones ordered State Farm to not only lower rates for homeowners insurance policies going forward, but to lower those rates retroactively to July 2015, requiring the insurer to pay refunds of about $100 million.

It was the first time any insurance commissioner has ordered a retroactive rate cut since Proposition 103 was passed, and State Farm has sought to block the order in court. A lawsuit over the matter is pending in San Diego, where a judge has ordered State Farm to proceed with the ordered rate cuts going forward but put the refunds on hold.

Insurance trade groups, in a brief submitted in that case, called the refund order an unprecedented move that would “have huge consequences for the industry” and potentially destabilize the state’s insurance market. But Jones and consumer advocacy groups have stood their ground on the department’s right to order rate cuts even retroactively.

Under Proposition 103, approved by voters in 1988, the department must approve auto and property insurance rates, ensuring that they are high enough that insurers will be able to pay claims but not so high that they lead to unreasonable profits. The law also allows consumer advocacy groups to oppose rate increases, call for hearings and inspect insurers’ books.

The disputes involving State Farm and now Farmers boil down to questions about what happens when insurance rates that have already been approved by the department are later questioned.

The State Farm matter goes back to 2014, when the insurance company asked the department to allow it to raise rates on renters and homeowners insurance rates. Advocacy groups Consumer Watchdog and the California Federation of Consumers moved to block the increase, saying it was unwarranted.

An administrative law judge hearing the case later found that the rate increase should be rejected and that the company’s rates were already too high. As the dispute wore on, Jones ordered the rates to be lowered as of July 2015, a move the department has characterized as a way of discouraging the company from dragging its feet in court so it could continue to charge the higher rates until new, future rates were set.

The roots of the Farmers case are quite different, but ultimately involve the issue of whether the commissioner can order a retroactive rate cut or otherwise tinker with already approved rates.

The case started with a 2015 lawsuit brought by Farmers customers who alleged that the company had been illegally charging some customers more than others — a practice known as “price optimization” or “dynamic pricing.”

The idea is that if a customer is willing to pay more, they should be charged more, while customers more likely to shop around for the best deal should be charged less. That kind of pricing has been tried in a wide array of industries but it’s not allowed for California insurers. Rather, insurers can base their rates only on a handful of state-approved factors, such as a driver’s safety record.

The plaintiffs in the case, three Santa Barbara County residents, alleged that Farmers had been using the practice for years and had charged illegal rate increases that were not part of the Farmers insurance rates approved by the Department of Insurance.

Superior Court Judge Amy Hogue referred the case, which is seeking class-action status, to the department in 2016. She said the insurance regulator had primary jurisdiction and should review whether Farmers had in fact charged customers outside of the scope of its approved rates.

That’s what Farmers had wanted. But then, in June, the department said it would also review “whether Farmers engaged in any illegal conduct in formulating or implementing” its 2008 rates.

Farmers objected and, in documents filed last week, said a review of the 2008 rates would not only be beyond the scope of Hogue’s order but would also be unlawful. It argues, as State Farm has in its case, that once an insurer’s rate plan is approved by the state, the insurer is required to follow that plan and the department’s approval should serve to shield the plan from a later challenge.

“The law does not support retroactive regulation,” said Rex Frazier, president of the trade group Personal Insurance Federal of California. “Hopefully this case is not the beginning of a trend where the state of California orders insurers to conduct business in a specific way and then seeks retroactive liability years later for operating as approved.”

Harvey Rosenfield, the author of Proposition 103 and founder of Consumer Watchdog, said Farmers appears to be trying to block any meaningful investigation into whether it has engaged in illegal price optimization.

“Farmers is trying to stonewall the elected insurance commissioner to prevent the commissioner from getting to the bottom of what it’s doing in California,” he said.

Michael Levy, deputy general counsel for the Department of Insurance, said the department’s approval of rate plans gives insurance companies protection, but that protection only goes so far.

If plans are submitted in a lawful, transparent way, insurers should nave nothing to fear. But if an insurer gets the department to sign off on a plan that includes something illegal, that insurer is not entitled to safe harbor, he said, though he added that there’s been no finding that Farmers has done anything wrong.

“If there was something hidden, that wasn’t brought to the department’s attention, you can’t expect to be absolved of responsibility for that if you get it through,” he said.

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