Insureds After COVID Premium Cuts Must Ask State Regulator First, Judge Rules

By | October 26, 2020

A federal judge has ruled that State Farm Fire and Casualty Co. does not have to return premiums to a small business customer because of the insured’s reduced business during the pandemic.

The judge in Missouri found that the plaintiff, Alissa’s Flowers Inc., must first exhaust administrative remedies through the state insurance commissioner’s office before seeking a court remedy.

In July, Alissa’s Flowers sued in Western Missouri federal district court alleging State Farm overcharged it by requiring that it pay insurance premiums that did not reflect changes in its business activity during the COVID-19 pandemic. Alissa’s Flowers argued the insurer had an obligation to adjust its premiums in response to reduced business operations according to the terms of the insurance policy.

Alissa’s Flowers asserted claims for breach of contract, breach of good faith and fair dealing, unjust enrichment, money had and received, and declaratory and injunctive relief.

However, State Farm sought and won a dismissal, arguing that the court lacked jurisdiction because Alissa’s Flowers failed to exhaust administrative remedies before filing its complaint.

The State Farm commercial casualty policy covered the period of March 5, 2020 to March 5, 2021. On March 13, 2020, a national emergency was declared concerning the coronavirus disease outbreak. The Missouri governor also declared a state of emergency on the same day and about a month later issued a stay-at-home order that lasted until May 3. On April 16, the county health department issued a stay-at-home order mandating the closure of all non-essential businesses. Alissa’s Flowers retail store was closed to the public from March 16, 2020 to May 11, 2020. The florist said this closure resulted in a loss of $100,000 and less exposure than was contemplated by the policy.

Alissa’s Flowers alleged the policy obligated State Farm to reduce its premiums in response to its reduced business activity based on three policy terms: (1) State Farm reserved its right to raise premiums, indicating the policy is subject to change; (2) the policy requires State Farm to perform a premium audit during the policy period and return unearned premiums; and (3) the policy requires State Farm to return any premium credit owed to policy holders.

State Farm maintained that Alissa’s Flowers was challenging its insurance rates and rating system and must therefore bring its claims before the Missouri Department of Insurance in order to exhaust administrative remedies before filing a complaint in court.

Alissa’s Flowers argued that its claims challenged State Farm’s premiums, not rates, and therefore it was not required to exhaust administrative remedies under Missouri insurance law “because the DOI does not have authority to regulate commercial casualty premiums.”

Alissa’s Flowers also argued that even if it were challenging State Farm’s rates, it was not required to exhaust administrative remedies because the language that a claimant “may” file a complaint with the DOI indicates administrative procedures are permissive.

However Judge Brian Wimes found that Alissa’s Flowers’ complaint described the direct impact State Farm’s rules and rates have on the premiums it paid and would have paid less in premiums if State Farm had conducted an audit and adjusted its premiums accordingly. The judge said this presumes State Farm would have applied a lower rate which factored in COVID-19 in computing a lowered premium. Thus, by Alissa’s Flowers own assertions, its premiums are “inextricably linked to State Farm’s rules and rates.” The policy also illustrates a close relationship between State Farm’s rules and rates and the premiums paid by Alissa’s Flowers in stating that State Farm’s premiums are “computed based on rates in effect at the time the policy was issued. The florist similarly alleged breach of contract against State Farm based on overpaid premiums under the policy.

The court concluded Alissa’s Flowers’ claims, in essence, “constitute a challenge to State Farm’s rates, rating plan, rating system and underwriting rules” at the time the policy was issued.

The judge also affirmed that Missouri law requires parties to exhaust their administrative remedies before a court may act. “Although the statutory language indicates an insured may choose whether to avail itself of the complaint procedures set forth, the Court finds that an insured must avail itself of the administrative process if it wishes to pursue judicial review,” Judge Wimes wrote.

Because Alissa’s Flowers failed to exhaust its administrative remedies before the DOI, the court granted State Farm’s motion to dismiss.

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