State Farm to Pay $352.5M to Settle Texas Residential Overcharges Case

A settlement has been reached in a long-running dispute between the nation’s largest homeowners insurer and the state of Texas over premium overcharges.

The Texas Office of Public Insurance Counsel (OPIC) announced on Feb. 27 that under a settlement with State Farm subsidiary, State Farm Lloyds, the company will refund $352.5 million in premium overcharges and interest to its Texas policyholders.

State Farm Lloyds, with nearly 27 percent of the market, is the largest homeowners insurer in Texas.

The settlement applies to residential policies that were issued or renewed between Sept. 7, 2003, through July 31, 2008, and the amount is a far cry from the almost $1 billion in overcharges and interest that OPIC alleged the company owed in a court filing in 2009. The current settlement amount is more, however, than the $310 million the company was ordered to pay in 2009 by then-Texas Insurance Commissioner Mike Geeslin.

“OPIC is very pleased to settle this long-standing rate dispute with significant refunds to policyholders. We are particularly glad that OPIC’s legal arguments resulted in the inclusion of policyholders from September 2006 through July 2008 in the settlement. These policyholders will receive $119.1 million in refunds that they would not have otherwise obtained,” Texas Public Counsel Deeia Beck said in a statement released by the agency.

Beck acknowledged the smaller settlement amount but said that “at the end of the day it comes down to what is best for policyholders. We could have continued the litigation for years resulting in larger refunds, no refunds, or something in between. Given all of the considerations and risks involved, we concluded that a settlement at this time on our agreed terms was in the best interests of policyholders.”

Texas Department of Insurance Commissioner David Mattax said he was glad that the more than a decade-long dispute with State Farm Lloyds was finally over.

“I am pleased to finally resolve this matter and begin returning money owed to State Farm Lloyds policyholders who were charged too much for their homeowners insurance between September 2003 and July 2008,” Mattax said in statement.

Patti Kelly, a spokesperson for State Farm, said the while the company believes “State Farm Lloyds’ rates are, and always have been, lawful and financially sound,” it also believes the “settlement allows us to focus on serving our customers and move forward without additional expense and distraction of continued litigation.”

The Mold Crisis

Texas’ regulators have long held that the company began overcharging its customers in 2003 and State Farm has been battling the assertion in court ever since.

The dispute has its origins in Senate Bill 14, which the Legislature passed in 2003 after homeowners insurers hiked rates in the aftermath of what was dubbed the “mold crisis.”

Between 2000 and 2003 Texas insurers paid out $4 billion in homeowners’ claims over toxic mold, the Insurance Council of Texas reported in May 2003.

SB 14 required homeowners insurers to file their rates with the Texas Department of Insurance. TDI then had a mandate to conduct rate reviews of all homeowners insurance companies in Texas at that time to determine if existing rates complied with rating standards.

The rate reviews were completed in September 2003. Of the 61 insurers reviewed, regulators found that homeowners rates for 29 were excessive and ordered reductions. Of the 29 companies ordered to lower rates 12 companies appealed, including State Farm, which had been ordered to reduce its homeowners rates by 12 percent.

Until the current settlement, State Farm was the last carrier fighting the rate cuts and refunds.

In August 2004, Allstate Texas Lloyds, an affiliate of the Allstate Corp. and the state’s third largest homeowners carrier, agreed to issue refunds of 8.75 percent of the premium paid by its Texas home insurance customers for policies with effective dates from Sept. 7, 2003, through Sept. 6, 2004.

In 2013, Farmers Insurance, Texas’ second largest homeowners insurance company, agreed to settle for $117.5 million the state’s claim that it had overcharged and underserved customers.

Customer Refunds

The company expects the refunds to go out to policyholders over an 18-month period, but they won’t begin immediately.

“It will take a few months to determine the refund amount for each affected policyholder,” Kelly said.

The company estimates the first eligible policyholders will start receiving refund checks later this year and that the process would likely extend through August 2016.

Policy refunds will vary between 2.6 percent and 6.2 percent of premium paid by individual customers, depending on the effective date of their policies, according to TDI. Interest rates will either be 5.25 percent or 9.25 percent depending on policy effective date.

TDI posted a copy of the settlement and a companion “frequently asked questions” document on its website.