State Farm Ruling Could Expand to Other Home Insurers

August 25, 2004

Attorney General Mike Hatch is intervening in a lawsuit that seeks to stop a State Farm insurance rate increase approved by the Department of Commerce earlier this year.

The agency’s decision would allow Minnesota’s largest home insurer to increase rates for some owners of older houses by as much as 6 percent.

The increase, which was to take effect in October, already is on hold. Gov. Tim Pawlenty last Friday ordered the Commerce Department to suspend it pending the outcome of the lawsuit.

Hatch is seeking a ruling that State Farm’s rate plan violates a Minnesota law designed to prevent discrimination against minorities, the elderly and the poor. Hatch also is intervening in a related class-action lawsuit that seeks $22 million in damages on behalf of 172,000 State Farm customers who claim they were illegally assessed surcharges from 1997 through 2002.

If the rate increase ultimately goes through, it could lead to a dramatic change in homeowners insurance beyond State Farm, officials said Monday.

Minnesota’s six largest home insurers use some sort of rating plan based on the age of a home’s utilities, according to a Commerce Department spokesman. These include American Family Insurance, Economy Premier Assurance Co., Illinois Farmers, Allstate and Auto Owners. Collectively, they control about 66 percent of the market in the state.

State Farm, which also is seeking to intervene in the case, maintains that risk – not the age of a home – determines its surcharges. A spokeswoman did not immediately return calls seeking comment.

Most large insurers in the state use similar plans to set surcharges and discounts for homeowners policies, said Commerce department spokesman Bruce Gordon.

They could be forced to reduce both surcharges and discounts if the state determines that other companies also are violating the so-called redlining law.

By intervening, Hatch has put himself in the unusual position of suing his own clients. Typically, the Attorney General’s office represents Commerce and the consumer-protection agency’s commissioner in legal disputes, but in this case, Hatch is seeking to join the other side.

Hatch said he had no choice: “We do not go into court and represent an agency on an order which is not appropriate.”

Nearly two years ago, former Commerce commissioner Jim Bernstein determined that State Farm had illegally based surcharges and discounts on the age of homes from 1997 through 2002. He fined State Farm and ordered it to end the surcharges and file for new rates backed by claims data if it wanted to renew those surcharges.

Only in the case of State Farm has Commerce investigated whether those surcharges could be justified based on the age of utilities or whether they were based on the age of homes themselves.

The company did file new data, but internal Commerce Department memos indicate that some staff members believe the data didn’t back up State Farm’s claims. If other large insurers, which have rate plans based on the age of utilities, are found to have used the age of homes instead of wiring, then they too may have to eliminate discounts and surcharges, Gordon said.

Hatch said a dramatic change is possible. “Other companies could also be affected. We’re just not aware of how many insurance companies there are that were engaged in this practice.”

Copyright 2004 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Topics Carriers Homeowners Minnesota

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