The Court of Appeal in San Diego has ruled that California’s insurance commissioner cannot force State Farm into paying over $100 million in refunds plus interest to drivers in the state – a decision the current commissioner and a consumer advocate have criticized.
In 2014, State Farm General – a wholly-owned, California-only subsidiary of State Farm Mutual – applied for a 6.4% overall rate increase for its home, condo and renter insurance. After assessing the application, Consumer Watchdog (CW) concluded that the rate change was excessive, and asked then insurance commissioner Dave Jones to convene a public hearing.
Jones eventually determined that the rate increase was unjustified and ordered State Farm General to reduce its home insurance rates going forward by about $77 million per year. The commissioner had also concluded that State Farm General had been overcharging its existing customers since July 2015, and ordered the insurer to refund more than $100 million.
To overturn the commissioner’s decision, State Farm filed four separate lawsuits in San Diego Superior Court. Last Friday, the Court of Appeal ruled in favor of the insurer.
In its lawsuits, State Farm maintained that the insurance commissioner has no authority to force an insurer to refund overcharges. To this, the insurance commissioner and CW pointed out that California voters changed the law so that insurers operating in the state would be notified that they must always maintain fair rates. The commissioner and CW also pointed to two instances where the California Superior Court unanimously upheld the authority of the commissioner to order rate refunds, additionally noting that voters gave the commissioner full authority to carry out insurance consumer protections under Proposition 103.
But the court rejected these arguments, calling Proposition 103 a "rule against retroactive rates.” The court also asserted that Proposition 103's "focus" was "on fairness to both consumers and insurers," adding that it was “not persuaded by CW's argument that '[f]orcing consumers to pay excessive rates would frustrate the purpose of protecting consumers from arbitrary insurance rates.'"
Both CW and the insurance commissioner argued that Proposition 103 protects Californians against attempts by insurers to conceal their investment income, and that State Farm was not entitled to an exemption from the rule. But the court ruled that Proposition 103's requirement that the commissioner consider whether insurance rates "mathematically reflect the insurance company's investment income" had to be read to allow State Farm Mutual to create a wholly-owned subsidiary in California. CW has argued that this tactic allows the insurer to “stash its least profitable investments in that subsidiary, and ignore the California business' proportionate share of the portfolio profits,” all while ignoring the actual economics of the business. CW has also pointed out that at the time, State Farm insured 20% of Californian homeowners.
CW has voiced its opinions on the court’s interpretation of Proposition 103.
"The voters did not pass Proposition 103 to protect the insurance companies. They have enough money and lawyers to protect themselves,” the organization said in a statement. “The text of the law makes clear its sole focus is to protect consumers against profiteering, discrimination, reckless insurance industry behavior and anything else that might harm consumers.
“The insurance industry would not have spent $63 million trying unsuccessfully to defeat Proposition 103 at the ballot box, and countless hundreds of millions more in legal challenges to the law since it passed, if the measure protected the industry's right to overcharge Californians, as the court suggests."
The court’s decision may also have implications for the estimated $3.5 billion in overcharges that current California insurance commissioner Ricardo Lara has ordered insurers to refund, CW said in a release. The overcharges are from auto insurance premiums insurers collected based on rates that were set before the pandemic led to restrictions.
"Californians passed Proposition 103 to protect themselves against arbitrary rates and discriminatory practices by requiring insurance companies to keep rates and premiums fair at all times or else be held accountable by the Insurance Commissioner or in the courts," said Proposition 103 author Harvey Rosenfield. "The Court of Appeal's decision has stripped the Insurance Commissioner of the powers the voters gave him to protect Californians against excessive rates. Consumer Watchdog will ask that it be overturned by the California Supreme Court."