Farmers Insurance is in the hot seat again. On November 24, 1998, T. Simonian filed a class action suit against Farmer’s in Los Angeles Superior Court ( Case # BC 201333). The suit alleges that Farmers wrongfully withheld a percentage of what they paid to settle claims covered by personal lines residential insurance policies – estimated by an outside source to be about 20%. Hence, on a $10,000 claim, Farmers would withhold approximately $2,000 until it had been provided with proof that a general contractor had done the repairs. Farmers argued that, as the withheld amount represented the overhead and profit of the general contractor, Farmers did not have to pay this unless a general contractor had performed the work.
The plaintiff argued that this practice is not disclosed to policyholders, and that overhead and profit is part of the actual cash value of a loss that is covered by the policy. Hence, plaintiff argued that Farmers’ practice of withholding payment for overhead and profit until proof has been provided that a general contractor was used to perform the covered repair work is wrongful, violates the terms of the policy and applicable law.
Farmers denies these allegations but has agreed to settle and compromise this litigation "to avoid further expense and protracted litigation". Subject to court approval at a hearing on August 1, Farmers has agreed to reimburse all eligible members of the class for the amounts withheld. The estimated amount to be paid out is $8 million, and includes no interest.
While this settlement seems on the surface to be a victory for consumers, the reality is quite different. Homeowners are simply getting back what rightfully belongs to them – and not a penny more. Farmers on the other hand has invested these monies in the intervening years, and can expect that a sizeable percentage of plaintiffs will never claim their due. Hence, Farmers has received no punishment.
This latest trouble with Farmers is but one of a string of troubles that stretches across the years. The high profile cases include the failure and refusal to pay damage claims in the Northridge earthquake. Farmers was a notable contributor to the Quackenbush slush fund. But in many ways, it is the smaller and generally unreported cases that provide the most troubling insights.
Pat English was the director of a homeowner association. When she attempted to expose corruption in the ranks of the other directors, the board sued her. Farmers, even though they had issued a policy to defend members of the board of directors, refused to defend her – but did not hesitate to defend the other board members. Other homeowners have complained that Farmers refused to defend them when their associations went after them in court. But these stories do not end here.
They filed complaints with the Department of Insurance, the Attorney General’s office, their state legislators – and received no help at all. For example, former attorney general, Dan Lundgren, repeatedly ignored requests by homeowners for assistance.
What these homeowners – and others – learned from these experiences is that insurance companies dominate legislatures and government departments. The vast financial muscle that insurance companies flex – ironically, out of the premiums of their victims – ensures that in 99% of the cases, their own interests are protected. Legislators need campaign funds. Insurance companies have the funds.
Hence, the occasional consumer victory is just that – occasional. In the ordinary, every day transactions, the consumer faces a daunting, uphill battle where Goliath routinely slays David, not the other way around.
Chubb Insurance is another example. Possessing a monopoly in the homeowner association insurance market (over 80% by its own estimate), it secures its premiums by promising to defend association boards against homeowners no matter what the reason or what the cost. It even bribes board members with offers of cheap insurance. Once again, legislators and attorney generals refuse to act.
So, as homeowners cheer this small victory, they remind themselves that in the larger context, the Augean stable has a lot more cleaning to do.
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