Court: Policyholders Can Question Farmers’ Fees

A California Court of Appeals has allowed policyholders in the Farmers Insurance Exchanges to question the alleged excessiveness of management fees charged to them by Farmers Group Inc., a wholly owned subsidiary of Zurich Financial Services.

In Benjamin J. Fogel, et al.,v. Farmers Group Inc., et al., the plaintiff holds automobile, homeowners, and umbrella insurance policies issued through Farmers Insurance Exchange, Fire Insurance Exchange, and Truck Insurance Exchange (collectively referred to as the Exchanges).

The Exchanges are reciprocal insurance exchanges, which according to court documents, are “‘an unincorporated business organization of a special character in which the participants, called subscribers … are both insurers and insured; for their mutual protection, they exchange insurance contracts through the medium of an attorney in-fact.'”

In August 2003, Fogel, on behalf of all policyholders of the Exchanges, filed a class action lawsuit against Farmers and the Exchanges. The original complaint alleged that the Exchanges required all policyholders to appoint FGI as their attorney-in-fact and that FGI breached its fiduciary duty and committed fraud by charging excessive fees. The complaint also alleged that FGI and the Exchanges engaged in unlawful and/or unfair business practices by the Exchange requiring policyholders to appoint FGI as their attorney-in-fact and by FGI’s charging of excessive fees.

The class action suit filed in 2004 by Fogel claims that FGI and its subsidiaries paid themselves more than $4.5 billion in fees from 2000 to 2002, resulting in at least a 43 percent profit over the costs of the services that FGI provided the policyholders. Fogel sought disgorgement of all excessive fees charged from 1999 to the present and an injunction against future excessive charges.

However, the defendants emphasized that FGI, doing business as Farmers Underwriters Association, was attorney-in-fact only for Farmers Insurance Exchange policyholders, and that Truck Underwriters Association and Fire Underwriters Association serve as attorneys-in-fact for policyholders in Truck Insurance Exchange and Fire Insurance Exchange, respectively. According to court documents, “One of the other arguments they made in the motion was based upon the form ‘Subscription Agreement’ that defendants asserted each of the policyholders signed when they applied for insurance.” Each agreement provided that the relevant entity was appointed as the policyholder’s attorney-in-fact, described the scope of its power to act on behalf of the subscriber, and stated that the subscriber agreed that the entity would collect a certain percentage of the premium as compensation for acting as attorney-in-fact. The defendants argued that FGI did not breach its fiduciary duty because it was undisputed that it collected less than 20 percent of the premiums as fees during the period at issue.

The recent court of appeals ruling rejected FGI’s argument that the fees had been approved as part of the rate requests FGI files on behalf of the insurance exchanges it manages. The court held that FGI and its subsidiaries owe a fiduciary duty to policyholders and must answer allegations that it overcharged them by several billion dollars since 1999.

“We reverse the summary judgment in favor of the attorneys-in-fact and direct the trial court to enter an order denying defendants’ motion and granting plaintiff’s motion to summarily adjudicate defendants’ exhaustion of administrative remedies affirmative defense,” the appeals court said.