State Farm to Pay $200 Million to Settle Class-Action Lawsuit

State Farm Mutual Automobile Insurance Co. on Friday agreed to pay $200 million to settle a class-action lawsuit charging it misled customers when it sold 4.4 million life insurance policies from 1982 to 1997.

Bloomington, Ill.-based State Farm didn’t admit to any wrongdoing and said it was settling to avoid a costly legal fight. “It’s in everyone’s best interest to settle this case,” State Farm Executive Vice President Roger Tompkins said in a statement.

State Farm, the largest insurer of U.S. homes and autos, is also the 39th-largest life insurer, according to A.M. Best Co. It sells policies through 16,500 agents.

Agents were accused of improperly selling insurance as an investment, using misleading forecasts for the number of premiums necessary for a “paid-up” policy and encouraging customers to use their policies to pay for unneeded, more costly replacements.

The settlement will include compensation such as automatic increases in interest rates applied to policies over a four-year period. Members of the class include 1.7 million former and 2.7 million current policyholders. The settlement also calls for a neutral party to assess individual claims by policyholders.

A state court in Illinois is expected to hold a hearing to grant final approval of the settlement in January. State Farm also said it will mail notices of the plan to policyholders starting in September.

Prudential Insurance Co. of America and other life insurers have settled similar suits over deceptive sales tactics in recent years.