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Court Weighs State Farm Appeal of Order to Refund $350 Million

Posted on 21 Dec 2011

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State Farm Lloyds has asked a Texas appeals court to reconsider an order requiring the company to refund about $350 million to consumers in the Lone Star State. That request is being weighed by Texas' 3rd Court of Appeals.

Earlier this year, Travis County District Court Judge Tim Sulak said Mike Geeslin, who was then serving as Texas insurance commissioner, acted within his authority when he ordered State Farm to pay at least $310 million plus interest for allegedly overcharging holders of homeowners insurance policies dating back to 2003. More than 1.2 million policyholders could be eligible for refunds should the order be upheld.

The suit against State Farm Lloyds, the largest writer of homeowners insurance in Texas, stems from the Texas Department of Insurance's allegations that the company overcharged its customers for homeowners policies purchased between 2003 and 2008. The TDI first issued a rate reduction order to State Farm Lloyds for excessive rates in 2003. But the company took the matter to court, and in 2008 a Texas appeals court ruled State Farm was denied due process when the TDI ordered it to reduce its filed homeowners rates by 12% (Best's News Service, May 27, 2008). The court sent the case back to the TDI for review, and the agency's actuaries determined State Farm had indeed overcharged but by 6.2% and not the original order's estimation of 12%.

State Farm has said in court filings that the facts do not support the refund.

"State Farm's objective is to ensure that we can fulfill our commitment to Texans who rely on us to keep our promises and be there when the unexpected happens," State Farm said in an email. "We have appealed the commissioner's ruling because we believe the ruling could harm State Farm's ability to do that. We believe the ruling is not supported by the evidence, and is contrary to Texas and federal law. Customers continue to choose State Farm as their homeowners insurer more than any other Texas homeowners insurer by a large margin, which is a real world demonstration that State Farm's rates are competitive."

Earlier this month, State Farm Lloyds was allowed to raise deductibles for homeowners' policies in the state to 1% of the insured homes value. State Insurance Commissioner Eleanor Kitzman also approved a request by the company to raise homeowners' rates by an average of 10%.

For State Farm, a ruling that Geeslin's order was justified could add to an already tough year for the company. In September, the company announced it had paid out more than $5 billion in catastrophe claims this year -- making 2011 the one of the worst years it's seen in such losses.
State Farm Lloyds currently has a Best's Financial Strength Rating of B++ (Good).

The top five writers of homeowners multiperil in Texas in 2011, according to BestLink, which provides online access to A.M. Best's database of insurance information, were: State Farm Group, which had a market share of 28.92%; Allstate Insurance Group, with 12.52%; Farmers Insurance Group, with 12.40%; USAA Group, with 7.67%; Liberty Mutual Insurance Cos., with 5.21%.