July 17--It's been a decade since Texas' top insurance regulator accused State Farm of overcharging its homeowner policyholders and ordered the insurance giant to pay back more than $250 million. The company refused and took the fight to court, where it is still going strong with no end in sight.
It has been so long that many of the people who are owed money by State Farm Lloyds have died, moved or forgotten about the disputed refund.
The case is far in the rearview mirror for Kay McKee of Georgetown, one of the many consumers who complained to the state about State Farm in 2003. She can no longer recall the details of her complaint. Officials at the Texas Department of Insurance can't even help jog her memory. They don't keep records that far back.
From her living room decorated with glass elephants and family photos, McKee, a 74-year-old grandmother, laughed when she thought about the amount of time the case has been active.
"It is interesting that it is still going on," she said. "I won't be too terribly surprised if we reach 20 years with still no closure."
State Rep. John Smithee, a Republican from Amarillo and the longtime chairman of the House's Committee on Insurance, said he has never seen anything like it.
"I don't know of any precedent or any other case in Texas where a dispute has taken this long," he said. "It doesn't happen every day and shouldn't have happened at all."
In the fight, State Farm Lloyds and the Texas Department of Insurance are pitted against each other in a legal battle of wills. The insurer maintains it has the right to set its own rates, while the regulator refuses to back off its 2003 finding that the company overcharged its customers.
Caught in the middle are 1.2 million Texas consumers, like McKee, who cannot collect the money the state says is due to them -- a total of more than $310 million with interest accruing, according to the department.
The epic fight began in 2003 when the Legislature passed Senate Bill 14, changing the insurance regulatory system in Texas to allow home and auto insurers to file for rate increases and immediately put them into effect. If the insurance commissioner deemed a rate to be excessive, he or she could order it lowered. It was called the file-and-use system.
Before 2003, about 80 percent of the home insurance market was unregulated, Smithee said. Then, many insurers became affiliated with Lloyd's companies, which are modeled after the Lloyd's of London insurance syndicate, to avoid state oversight.
Insurers knew in 2003 that they would fare better with file-and-use, compared with other new forms of regulation. By giving insurers what they wanted, many lawmakers hoped the companies would respond by dropping their rates from historic highs that came after an explosion of mold claims in 1999 and 2000.
Of the 32 homeowner insurance companies that were ordered to reduce rates, 30 did so. Only State Farm Lloyds and Texas Farmers Insurance challenged the ordered rate reductions. The department settled with Farmers in 2004, but State Farm Lloyds hasn't budged. The company has maintained that its rates were not the highest in the state's competitive homeowner insurance market and should not be considered excessive.
These days, State Farm Lloyds' rates are among the highest in the state. In Travis County's 78704 ZIP code, for instance, the insurer charges more than any other insurance company. For a $200,000 policy, the company charges $2,175 per year, according to a Texas Department of Insurance Web tool. The next highest rate of a major carrier, Texas Farmers Insurance, is $1,245.
State Farm Lloyds, which held 27 percent of the Texas market in 2012, earned 13.2 cents of profit on the dollar in Texas, compared with the statewide industry average of 8.5 cents, department data show. (Insurance companies' profits vary widely from year to year, and in years with disasters, such as hurricanes, the companies generally lose money -- often a lot of it.)
State Farm spokesman Gary Stephenson couldn't say very much because of the pending case, but he said the company stands by its original position.
"We still believe our position is correct," he said, adding that customers tend to stay with the company because of its record of excellent service.
But not everyone believes State Farm Lloyds is simply trying to stay solvent and provide superior service.
Alex Winslow, executive director of the consumer advocate group Texas Watch, said State Farm is pocketing millions of dollars because of excessive rates and is benefiting from investment gains from the money that he says came from overcharging customers.
"There is a perverse incentive to overcharge Texas homeowners and drag out lawsuits with customers and regulators," he said in a statement. "State Farm's policyholders deserve relief from these overcharges and a resolution to the dispute that requires State Farm to refund every penny it owes, plus interest. Nothing less is acceptable."
The state's regulatory system needs more power to prevent companies from ripping off consumers and allowing such drawn-out court battles, he said.
"We should give consumers more tools and the security of real regulatory oversight," Winslow said.
The case has been in and out of courts in Travis County and has twice been heard by Texas' 3rd Court of Appeals, where it still lingers. The parties have been awaiting some word from the court since oral arguments in 2011. But even after a decision comes, the case is likely to be appealed to the state Supreme Court.
Even as the epic rate case inches along, State Farm Lloyds continues to raise rates on its homeowner policyholders, announcing last year a 20 percent increase. The move prompted the state-funded consumer advocate to call for State Farm to pull back.
The company refused, and the case is still pending.
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