Geico Sued for Alleged ‘Woefully Inadequate’ Coronavirus Auto Insurance Discount

Berkshire Hathaway’s Geico, the country’s second largest auto insurer, is being targeted by a potential class action for allegedly overcharging its policyholders during the pandemic.

A lawsuit filed in federal court in Illinois alleges that the 15% “Geico Giveback” premium discount program the insurer announced in April to reflect reduced driving during the coronavirus outbreak is “woefully inadequate to compensate for the excessive premiums that customers have paid as a result of COVID-19.”

The plaintiff maintains that the discounts should be 30% for just the period between mid-March and the end of April, based on a report by The Center for Economic Justice and the Consumer Federation of America.

The plaintiff accuses the insurer of enjoying “substantial windfall in profits” during the pandemic, citing reports that for the first quarter of 2020, Geico generated a pretax underwriting gain of $984 million, an increase of 27.8% over the same quarter in 2019.

The complaint further claims that the while the Geico program applies a 15% discount on new and renewal auto insurance policies, it does not apply the discount to the premiums that customers have already paid or will continue to pay on policies already existing at the start of the COVID-19 pandemic.

When it announced its giveback program in April, Geico said the discounts would total about $2.5 billion.

Geico had not yet responded to a request for comment on the lawsuit as of press time.

As shelter-in-place policies went into effect in Illinois and in other states, many auto insurers returned a portion of premiums to policyholders, and some are continuing to do so, as a way to reflect the reduced likelihood of claims as people drive less. Many policyholders received back 15% to 20% on two to three months of premium. The total returned has been estimated at more than $10 billion. According to California officials, that state’s drivers have received $1.21 billion in savings for March, April and May.

The plaintiff in the Illinois lawsuit, Briana Siegal, is a Geico policyholder from Chicago. She is seeking certification of a class that would include all Illinois residents who purchased personal automobile, motorcycle, or recreational vehicle insurance from Geico covering any portion of the time period from March 21, 2020 to the present.

The complaint further seeks disgorgement of the ill-gotten gains obtained by Geico, declaratory and injunctive relief, and damages.

Geico’s Approach

When it announced its discount, Geico said the 15% credit would apply its auto and motorcycle customers as their policy comes up for renewal between April 8 and Oct 7. The credit would also apply to any new policies purchased during this period.

The average auto policy has a semi-annual premium of about $1,000 and generally covers more than one vehicle. Geico said it expects credits to average about $150 per auto policy and $30 per motorcycle policy. The company estimates the benefit to its 18 million auto and one million motorcycle customers will be approximately $2.5 billion.

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Current customers were told they could expect to see the discount when they renew.

At Berkshire Hathaway’s annual shareholder meeting in May, CEO Warren Buffett was asked whether Geico will likely experience unusually high profitability in 2020, even after giving customers a 15 percent credit to reflect reduced driving during the pandemic.

Noting the companies are handling the discounts differently, with GEICO giving 15 percent over a period of six months, Buffett added that other insurers are giving higher discounts over a shorter time period and maintained that Geico’s $2.5 billion is the largest dollar amount.

He said there are a lot of variables to consider. “We made our best guess as to what we’re going to do to reflect the current reduced accidents in our premiums that we receive really for the next year,” he said, pointing out that while the discounts apply for the six months from April through October, policies renewing in October extend into April.

“We’ve made a guess on it. And we’ll see how it works out,” Buffett said.

During the first quarter, which ended prior to the start of the discount period, Geico reported $984 million in pretax underwriting earnings, a 28 percent increase over first-quarter 2019, as written premiums grew 4.5 percent to $9.7 billion. With shelter-in-place actions already impacting claims, frequencies fell 12-14 percent for property damage and collision and 6-8 percent for bodily injury, while claim severities rose 6-9 percent for the property coverages and 4-6 percent for bodily injury.

In a recent outlook on personal lines insurance, Fitch Ratings acknowledged that the premium returns may have fallen short of what they could be but thinks insurers may pay a price.

“Recent premium returns and rebate actions do not fully offset recent lower claims experience, but will foster price competition that may lead to poorer performance when economic and claims activity normalizes,” said James Auden, managing director, Fitch Ratings.

The biggest auto insurer, State Farm, offered a dividend on average of 25 percent of premiums that customers owed during the period March 20 and May 31, or about $20 per month for each vehicle insured. This program amounts to about $2 billion, according to the insurer.

State Farm said it has also filed rate reductions in various states. The national average for those rate reductions is 11%, or approximately $2.2 billion.