Consumer Watchdog Saves Policyholders Over $325 Million from State Farm Auto Rate Hike; Dispute Erupts Between Commissioner Lara and Chief Administrative Law Judge Who Finds Department of Insurance Is Not Ensuring Rate Cases Are "Fundamentally Fair"

LOS ANGELES, Dec. 11, 2024 /PRNewswire/ -- Consumer Watchdog recently reached a settlement in a matter involving a proposed 23.4% rate hike requested by State Farm Mutual Automobile Insurance Company, resulting in total savings of over $325 million for California policyholders. State Farm's new rate will take effect for all new and renewal policies on January 31, 2025, impacting over 4 million policyholders. But as a result of Consumer Watchdog's intervention, State Farm agreed to a lower rate increase of 17.7% compared to its initial 23.4% request.

Consumer Watchdog's efforts centered on addressing alleged overestimations in State Farm's projected losses and ensuring compliance with Prop 103's transparency requirements, including disputes over expenses for institutional advertising and methods for calculating claims and losses. Consumer Watchdog exposed potential violations in State Farm's methodology, including improper inflation projections and expense exclusions. "In the last year, Consumer Watchdog has been able to prevent over $475 million in unjustified rate hikes for State Farm auto customers through public rate challenges under Proposition 103," said Consumer Watchdog staff attorney Ryan Mellino. 

State Farm submitted its rate application to the Department of Insurance in April 2024, seeking a rate increase of 23.4% to its automobile insurance policies, totaling over $1.3 billion. This request followed an approved rate increase of over $800 million for the same line of insurance that became effective just this past February. Consumer Watchdog challenged State Farm's rate hike as excessive under Proposition 103 and the Department's ratemaking regulations, arguing that State Farm's projected losses were being inflated due to improper trend selections that gave too much weight to volatile recent experience and did not provide realistic projections for the future. Additionally, Consumer Watchdog alleged that State Farm had used a method for projecting Bodily Injury/Property Damage and Uninsured Motorist claims that resulted in excessive rates for those coverages. Further, Consumer Watchdog challenged State Farm's use of paid loss development, which relied in part on internal State Farm determinations that Consumer Watchdog was not privy to, as well as relying on an inaccurate representation of the current inflationary environment. Finally, Consumer Watchdog argued that State Farm had failed to properly exclude expenses from its rate calculation for institutional advertising (ads marketing an insurer's brand as a whole, rather than marketing a specific insurer), as required under state regulations. (Read the Petition here.)

Consumer Watchdog requested that State Farm provide further information to substantiate its trend selections, claims about losses, and other information in its application. After exchanging information over the course of several months and multiple calls between the Parties, and through negotiations with State Farm and the Department, Consumer Watchdog successfully advocated for a lower rate indication of 17.7%, which reflected Consumer Watchdog's staff actuary's calculation of the maximum supported rate indication. As a result, State Farm policyholders in California will pay over $325 million less in premiums than they would have pursuant to State Farm's desired rate increase. (Read the Settlement Agreement here.)

This matter also highlights the importance of California's voter-approved insurance reform law, Proposition 103, which requires that insurers open their books and prove they need to raise rates in a process subject to full transparency, including the right of consumer representatives to review and challenge improper rates and practices. 

During the negotiations, a conflict broke out between the Insurance Commissioner and the Department of Insurance's Chief Administrative Law Judge, Kristin Rosi. She called a hearing for Friday in Los Angeles that was cancelled by an order of the Commissioner that Consumer Watchdog believes to be illegal. The insurance code specifies the Commissioner shall not interfere with supervision of the ALJs. (Read the Notice of Ex Parte Communication here.)

The conflict centers on decisions issued by Chief Administrative Law Judge Rosi that found that the Department had not been properly following its own regulations or the purposes of Proposition 103, and concluded that all settlements of rate matters must be reviewed by an Administrative Law Judge to ensure they are "fundamentally fair." Rather than address Judge Rosi's concerns, the Department retaliated by issuing an internal delegation order purporting to limit or preclude the ability of its Administrative Law Judges to review proposed settlements unless the Department allows a matter to proceed to a hearing. Insurance Commissioner Lara then vacated Judge Rosi's decisions, explaining, among other things, that the CDI is not complying with Proposition 103. CALJ Rosi called a hearing on these issues for this Friday. (Read Consumer Watchdog's 12/5/24 Letter to Commissioner Lara here.)

While the Commissioner subsequently issued an order purporting to vacate the hearing, Consumer Watchdog objected to his order, arguing that he does not have the authority to cancel the hearing. Unless the Administrative Hearing Bureau confirms that the hearing is off-calendar, Consumer Watchdog intends to appear at the Friday hearing as originally scheduled. "We look forward to the opportunity to defend and advocate for the rights of consumers at Judge Rosi's hearing this upcoming Friday," said Mr. Mellino. (Read Consumer Watchdog's Objections to Order Vacating Hearing here.) 

According to the Consumer Federation of America, Prop 103 has saved California motorists over $154 billion since 1989. Consumer Watchdog has saved California consumers over $6 billion over the last 22 years by challenging excessive and unfair auto, home, business, and medical malpractice rates.

For more information about Proposition 103 visit: https://consumerwatchdog.org/prop-103/

SOURCE Consumer Watchdog