Zurich Settles Class Action Lawsuit for $455M Over Insurance Exchanges

Zurich Financial Services Group and its subsidiary, Farmers Group Inc. (FGI), have settled for $455 million a nationwide class action lawsuit that is pending in Superior Court in Los Angeles. The settlement money will be made available to up to 13 million policyholders upon execution of a formal settlement agreement and court approval.

The proposed settlement in the matter of Fogel vs. Farmers Group Inc. will resolve all claims, dating back to 1999, in a complaint originally filed in August 2003.

In the lawsuit, Benjamin Fogel, who held automobile, homeowners, and umbrella insurance policies issued through Farmers Insurance Exchange, Fire Insurance Exchange, and Truck Insurance Exchange, filed on behalf of all policyholders of the Exchanges a class action lawsuit alleging that FGI was the attorney-in-fact for the policyholders of all three 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 to the policyholders and committed fraud by, among other things, charging excessive AIF fees.

The original complaint also alleged that FGI and the Exchanges engaged in unlawful and/or unfair business practices based upon two practices – the Exchanges’ requiring policyholders to appoint FGI as their attorney-in-fact and FGI’s charging excessive AIF fees – as well as other conduct.

Zurich and FGI did not accept that there is any basis for the plaintiff’s claims regarding the management services fees that FGI charged to the Exchanges. Under the terms of the settlement, $455 million will be made available to up to 13 million policyholders who may qualify for a distribution, with any residual amount going to the Exchanges owned by their respective policyholder subscribers. While individual payments may vary considerably, this averages to an estimated $35 per class member or policyholder subscriber, Zurich/Farmers said. Zurich also will pay attorneys’ fees to class action counsel of up to $90 million.

(When policyholders buy insurance via an Exchange, they are asked to sign a “subscription agreement” appointing FGI or one of its affiliates as the attorney in- fact to manage certain operations of the Exchanges on behalf of the applicant. The agreement specifies a management services fee to be paid to FGI for these services. The fee is part of the total premium and is reflected in rate filings to the regulators who, where required, ultimately approve the respective insurance rates, the companies said.)

As part of the settlement, the plaintiff has agreed to dismiss the case and drop all claims against FGI and its parent Zurich.

Zurich said it decided to settle the case to provide certainty to its shareholders and clarity to customers, as well as to avoid the risks and significant expense of continued litigation. The insurer said that because the case would have depended in part on events dating from years or even decades ago, its ability to “mount a vigorous defense would have been constrained by the passage of time, the turnover of Farmers’ customers and agency force and the challenge of retrieving subscription agreements on policies, many of which expired long ago.”

In addition, as part of settlement Zurich announced initiatives at FGI to raise standards of customer communication. These include providing welcome packs and additional disclosures to Exchange policyholder subscribers, and providing additional training to Farmers agents and front-line employees regarding the subscription agreement and related procedures.

Zurich said it believes the financial settlement and these additional measures put to rest the issues raised in the suit.

The settlement does not affect the insurance coverage for current policyholders.

Zurich said the proposed settlement and related costs will be fully funded by internal resources.