State sues insurance giant Farmers; top officials doubt firm losing money

8/6/02

Houston, TX – The state of Texas sued Farmers Group Inc. on Monday, accusing the U.S. insurance giant of charging consumers excessive and unjustified rates for homeowners’ coverage through deceptive trade and discriminatory practices.

The lawsuit, filed in Austin, accuses Farmers – the state’s second- largest homeowner insurer – of reducing coverage while increasing premiums by claiming the company is losing money when the insurer actually is turning a profit, particularly on management fees.

“We will not tolerate deceptive or illegal activity in order to pad the bottom line,” said Attorney General John Cornyn, who along with Gov. Rick Perry and Insurance Commissioner Jose Montemayor announced the lawsuit at a news conference in Houston.

The lawsuit, part of an active investigation of the insurance industry in Texas, seeks an injunction barring Farmers from what the state considers improper business practices and a refund of “all excessive premium payments to Texans aggrieved by Farmers’ practices,” which could total up to $140 million.

The state also seeks civil penalties up to $10,000 per violation and $25,000 per Texan harmed by any of the company’s illegal practices.

The state further accuses Los Angeles-based Farmers of failing to notify policyholders in writing that credit history affects premiums and their ability to renew policies.

It also alleges that the Texas Department of Insurance has found that Farmers is improperly charging Texans to cover catastrophes in other states.

Perry said he doesn’t believe claims from Farmers and the other top insurers in Texas – Allstate and State Farm – that they are losing money because of higher costs from mold claims and other factors.

The suit claims in fiscal year 2001, Farmers had an after-tax profit of $438.7 million from its management fees.

“As governor, I’m committed to taking action against unscrupulous corporate actors,” Perry said. “Homeownership is at the heart of the American dream and I will not allow companies like Farmers to destroy that American dream in the state of Texas.”

Bill Miller, a Farmers spokesman, said the company has not violated any Texas laws but in fact has stayed committed to the state even though the company continually loses money, he said.

From January through May of this year, Farmers has lost $390 million in Texas; last year, the company lost $500 million, Miller said.

“Nationwide, less than 20 percent of our homeowners premiums come from Texas but an excess of 40 percent of our losses come from Texas,” he said. “Even though we are losing lots of money, we want to stay in Texas.”

Last August, Farmers became the first major insurer to stop offering new homeowners policies in Texas, a move that was followed by some competitors. In July, the company reversed course on its new rule not to write new policies on homes that have had a water claim in the past three years or homes older than 30 years with certain types of plumbing.

Farmers, in Texas since 1954, historically has had a customer base of about 700,000 homeowners, Miller said, and this year it’s added 50,000 homeowners.

Miller called the lawsuit “political harassment.” Perry is running for re-election this year while Cornyn is the Republican nominee for U.S. senate.