Farmers Insurance Group has agreed to refund $1.4 million in homeowners insurance premiums and pay $2 million in fines to settle allegations by California regulators that the company overcharged more than 5,000 customers and arbitrarily refused to renew others’ policies.
In complaints dating back to 2003, the California Department of Insurance claimed Farmers overcharged 5,237 policyholders by automatically classifying their homes as being at a higher risk for fire when it lacked data on the nearest fire-hydrant location.
Farmers used a geographic underwriting system that assigned “public protection class” risk codes to properties based primarily on their proximity to fire hydrants, investigators said. Whenever the system failed to assign public protection codes to properties, the complaints alleged, Farmers simply assigned them the highest risk code, resulting in higher premium charges.
When Farmers attempted to correct the coding errors by implementing a new system, accurate information from the prior system was not transferred to the new system, resulting in further errors, according to the order implementing the settlement.
Although Farmers denied wrongdoing, it agreed to refund $1.36 million to 5,327 policyholders who were assigned incorrect public protection class codes.
Farmers said such issues have since been resolved because all insured properties now have fire-hydrant information, and default codes are no longer used.
The complaints also alleged that Farmers overcharged more than 500 other policyholders because of erroneous records of their claims history, and arbitrarily refused to renew others’ policies.
Under Farmer’s so-called “Property Experience Rating Plan” (PERP), the Department of Insurance charged, some policyholders were charged for losses that the company did not actually pay.
Farmers agreed to refund $21,168 to 392 policyholders who were denied “Claims Free Discounts” for claims or inquiries that Farmers set aside reserves for, but ultimately did not pay.
In some cases, homeowners may have filed claims or made inquiries that never resulted in payment, or a single event may have been treated as two or more claims.
Farmers also refunded $34,170 to 170 policyholders who lost their Claims Free Discount even though their claims were ultimately subrogated, or paid by another party.
The complaints alleged other policyholders were arbitrarily denied the opportunity to renew their policies based on the number and types of claims they filed, although Farmers did not have clear renewal risk eligibility guidelines.
In the order, Farmers agreed that any decisions not to renew policies in the future will be in line with established guidelines, and that any exceptions “should be an infrequent occurrence and must be fully documented.”