The state of Texas filed a multimillion-dollar lawsuit Monday against Farmers Group of Insurance Cos., alleging the Los Angeles company charged Texas policyholders higher premiums to pay for disasters in other states, improperly used credit histories to set rates and wrongly limited coverage for water damage.
The lawsuit, filed in state court in Austin, is part of a national backlash against insurance industry efforts to raise premiums, limit coverage and in some cases quit whole lines of business. Insurers say these actions are a response to the double whammy of rising claims and declining profits on investments. But a national coalition of consumer groups recently accused the industry of using these factors as an excuse for price gouging.
At a news conference, Texas Gov. Rick Perry and Atty. Gen. John Cornyn said their accusations grew out of a continuing investigation of property insurers in the state, which is a major battle zone for lawsuits over mold-related illnesses--claims the industry portrays as one of the chief threats to its financial health. Farmers, a unit of Zurich Financial Services, writes about 20% of the homeowner policies in Texas.
Texas officials said their lawsuit asks that Farmers be fined millions of dollars for alleged deceptive practices and that it be forced to refund as much as $140 million to its Texas policyholders.
In a statement, Farmers denied it has violated Texas laws, and its Texas chief executive, John Hageman, accused Perry and Cornyn of "political harassment." Perry is up for reelection on the Republican ticket this year and Cornyn is the GOP nominee for U.S. Senate. Zurich, which is based in Switzerland, didn't immediately reply to a request for comment.
Investment profits during the late 1990s allowed property insurers to offset losses on operations and keep premiums low in a battle for market share.
But as investment markets were hammered last year, the U.S. property-casualty industry recorded its first net loss after taxes, a deficit of $7.9 billion, according to the Insurance Services Office, an industry-funded data center.
In California, insurers of homes and autos this year have filed 241 requests for rate increases with the Department of Insurance. Similar actions across the nation caused Americans for Insurance Reform, a New York-based coalition of consumer groups, to write July 30 to insurance commissioners in all 50 states calling for tougher regulation of the companies.
The Texas case "is part of the same insurance cycle we are seeing here in California, in which insurance companies try to pass their own investment losses on to consumers--either in higher rates or reduced coverage," said Douglas Heller of the Foundation for Taxpayer and Consumer Rights in Santa Monica. He said the industry's finances are fundamentally healthy, and it "is trying to get consumers to shoulder [its] losses in a bear market."
Saying homeowner's insurance will be an emergency issue in the next legislative session, Cornyn this year called for new laws giving the state the ability to impose across-the-board rate freezes and to restrict the use of credit scoring to set rates.