Lawsuits, court rulings prevent policyholders from getting money

09:00 AM CST on Saturday, February 4, 2006

By TERRENCE STUTZ / The Dallas Morning News

AUSTIN – More than half a billion dollars. That's how much Texas' three largest insurers owe homeowners, state officials say.

But because of a combination of lawsuits, court rulings and various legal maneuvers, the policyholders of Allstate, Farmers and State Farm – collectively holding about 58 percent of the market – are still awaiting checks and premium reductions that regulators ordered to compensate for overcharges.

And there's no end in sight.

"When you get into court in some of these cases, it's like walking in mud," said Jim Hurley, a spokesman for the Texas Department of Insurance.

Mr. Hurley said the agency is pursuing every avenue to get the money to its rightful owners, about 2.2 million homeowners across the state, but those efforts are now bogged down. The companies say their rates are fair, and in Farmers' case, a lawsuit by its own policyholders has delayed payments.

The various legal fights stem from regulators' efforts to force refunds after insurance costs skyrocketed because of the mold crisis of 2001-02. And since none has been resolved, the total cost of the case is piling up.

Alex Winslow of Texas Watch, a consumer group active in insurance rate issues, said State Farm and Allstate have been found by the state to be clearly overcharging their customers, with the excessive charges mounting daily. The half-billion figure is a running total of refunds ordered for the three companies combined and does not include any interest they might have to pay.

"It is past time for these companies to quit abusing their policyholders and return the money that rightfully belongs to them," he said.

Insurers made record profits in Texas in 2004, with an average loss ratio of 27.6 percent. In other words, Texas insurers paid out 27.6 percent of premiums to cover their property losses 2004.

That figure was less than half the 58.5 percent loss ratio in 2003, considered a good year for the industry. That followed two years in which companies operated in the red. No figures are available yet for 2005.

The insurance department accused State Farm of overcharging its million customers in Texas by about 12 percent dating back to the fall of 2003. Estimates of the overcharges – or potential refunds to policyholders – have ranged to more than $350 million plus interest.

With the most money to lose, State Farm mounted a legal strategy that has held the state at bay for 2 ½ years. State Farm won the last round in state district court when a judge ruled the company was denied due process after the commissioner of insurance ordered it to cut rates 12 percent in the fall of 2003.

The attorney general's office appealed on behalf of the insurance department, and the case is now before the state's 3rd Court of Appeals.

"We believe our current rates are fair and competitive," said Sophie Harbert, a spokeswoman for State Farm Lloyds, the company's home insurance subsidiary in Texas.

"Our base rates for homeowners insurance have not changed since January of 2003," she added, pointing out that Texas is known for damaging and often catastrophic weather conditions.

Ms. Harbert said it was the insurance department that was found to be violating State Farm's legal rights in the most significant ruling so far in the case. The state was shut out on another legal front when State Farm lawyers blocked an attempt by the insurance commissioner to put the company's rates under direct state supervision.

Allstate is fighting over a smaller amount, but the state's No. 2 insurer is just as adamant that its rates are not excessive.

"The recent hurricanes on the Gulf Coast pointed out the need for adequate rates so we can maintain our obligations to our policyholders," said Joe McCormick, a spokesman for Allstate. "Our current rates are adequate, and they are also competitive across the board."

The state ordered Allstate to reduce its homeowners rates nearly 9 percent in a case that began in the fall of 2004. More than $60 million in alleged overcharges, plus interest, is at stake in a case before a state administrative law judge.

Unlike Farmers and State Farm, Allstate did not initially oppose a rate reduction order from the commissioner after the reform law went into effect. Allstate agreed to cut its rates 10 percent and consider another 8.75 percent reduction a year later. The insurer decided to issue refunds of $60 million in the fall of 2004, but balked at the second cut, appealing to a state administrative law judge to head off the reduction.

Mr. McCormick said Allstate's home insurance rates are less than they were in early 2003, before the Legislature passed a massive insurance reform law later that year.

Several other smaller insurers reduced their premiums under orders from the insurance commissioner, and even Farmers reached an agreement with the state in 2004.

Farmers Insurance, unlike the other two heavyweights, agreed to refund $117 million to its Texas customers in a settlement with the state, but a group of plaintiffs blocked the agreement in a case expected to be heard by the state Supreme Court. The plaintiffs contend the settlement was a bad deal for Farmers policyholders.

That settlement, which ended a 15-month standoff between Farmers and the insurance department, reduced premiums for homeowners coverage by an average 20 percent. Farmers agreed to trim rates 5 percent through mid-2006 and to give its customers an additional 15 percent when their policies came up for renewal in 2005.

But the agency came under criticism for dropping its demands that Farmers issue refunds for millions of dollars of overcharges in 2003 and 2004. Mr. Winslow said that the insurance department needs to use new powers given to it by the Legislature last year, such as assessing stiff financial penalties if a company continues to charge excessive rates.

"We still think homeowners are being charged too much in Texas," Mr. Winslow said.

Here's a look at the three major pending homeowners insurance disputes:

State Farm: Sued the Texas Department of Insurance seeking to overturn a 2003 state order that the company reduce its homeowners premiums by 12 percent. State Farm won the first round, and the case is on appeal. If State Farm loses, it would be on the hook to its policyholders for more than $350 million, plus interest.

Farmers: Has agreed to refund $117 million in overcharges to its customers, but that's been frozen for three years because of a lawsuit filed by a group of Farmers policyholders who say it is a bad deal. The Texas Supreme Court is expected to hear the case.

Allstate: It's contesting a state order to reduce its rates by nearly 9 percent in a case that began in the fall of 2004. Allstate, like State Farm, disputes insurance department contentions that it is overcharging Texas customers. An estimated $60 million, plus interest, is riding on the case, now before a state administrative law judge.

E-mail tstutz@dallasnews.com