State Farm Told to Justify Its Rates, Practices


Insurance Commissioner John Garamendi on Thursday slapped State Farm Group, the state’s largest insurer, with an unusual order to prove that its rates and fees are not excessive and that some of its practices do not violate state law.

At a news conference in Sacramento, Garamendi said he will convene hearings in January to determine whether the company’s rates should be cut. The order follows State Farm’s recent application for an 8.3% increase in its homeowners rates. State Farm writes one in four homeowners policies in California and one in five auto policies.

Bloomington, Ill.-based State Farm said it was surprised by the action and that many of the issues raised in the order had already been resolved or were the subject of continuing negotiations.

Other industry officials denounced Garamendi’s move as political grandstanding.


After three years of ignoring virtually all rate increase requests, Garamendi is under pressure to act on several applications. Under a new state law, which he criticized, a rate increase application is automatically approved unless the commissioner acts on it within 180 days.

The highly public action against the state’s No. 1 insurance company is evidently meant to signal other insurers that Garamendi is determined to hold the line on rates in the coming year.

Proposition 103, the 1988 insurance rollback initiative, authorized the commissioner to require an insurer to justify its entire pricing scheme. Garamendi said this is the first time he has exercised that authority.

“It’s a very high-visibility, very adversarial and hostile thing to do,” State Farm lawyer Judith Mintel said. “I don’t know why he would do it this way--if you take it out of its political context.”


The political context is Garamendi’s candidacy for governor, which he has said he will formally declare next month.

Another factor is State Farm’s refusal to pay a $235-million rebate to policyholders that Garamendi ordered two years ago under Proposition 103. Enforcing Proposition 103 was one of Garamendi’s top issues as a candidate for insurance commissioner. It also is a likely issue in the gubernatorial race.

Garamendi said the action arose from a routine examination of State Farm that began in December, 1992, and turned up the problems he cited.

In the eight-page order released Thursday, the Insurance Department cited 24 examples of suspected overcharging or “unauthorized, deceptive, discriminatory and illegal practices.”

Among the allegations--and State Farm’s replies--are that:

* The company’s auto and homeowners rates are too high. State Farm’s Mintel said the auto rates were approved by the department in 1990 and have not changed since. She said the company has asked for an 8.3% increase in homeowners rates and can justify it at the hearings.

* State Farm automatically updates homeowners policies to reflect current market value, which can result in unlawful premium increases. In its pending rate increase application, it also seeks to cap guaranteed replacement coverage at 120% of policy limits.

“Garamendi criticized us following the Oakland firestorm for allowing customers to become underinsured,” Mintel said. “Now he turns around and attacks us for the opposite.”


* State Farm illegally combines the driving records of all motorists named in an auto policy. Thus, if a couple and their teen-age son each has one accident or one traffic violation, the carrier assesses them three “points,” which disqualifies them for the 20% “good driver” discount.

Mintel defended the policy, saying that State Farm insures the risk to the car--not the driver--and that such a car would have been involved in three accidents or violations, making it much riskier than a car driven by only one person with a single violation.

* State Farm illegally levies a $50 surcharge for filing financial responsibility forms with the Department of Motor Vehicles. Mintel said the fee, which only affects motorists with drunk driving convictions, was approved by the Insurance Department.

Mintel said the company is concerned that the broad scope of the allegations may delay action on State Farm’s homeowners rate application.

But David E. Fountain, spokesman for the Personal Insurance Federation of California, a trade organization, said that is precisely the point: Garamendi hopes to delay things long enough so he will not have to make a controversial decision to approve a rate increase before he confronts state Treasurer Kathleen Brown in the Democratic primary election June 7.

“Whenever Garamendi smells what he thinks is a political issue, he acts like a dog in heat,” Fountain said. “It’s about time he got hosed down.”

Garamendi set a Tuesday meeting to determine a schedule for the hearings, which will take place in San Francisco before Administrative Law Judge Elizabeth Laporte.