Legal tactics stall insurance reform
Companies' court fights upset lawmaker who wanted home rates cut
11:01 PM CDT on Sunday, September 16, 2007
tstutz@dallasnews.com
AUSTIN – Four years after the Legislature took aim at runaway premiums for home insurance, two of Texas' biggest insurers are battling state efforts to lower their rates, and sponsors of the 2003 insurance reform law say homeowners are still paying too much.
State Farm and Allstate, the two largest property insurers in the state, have used their sizable legal staffs to fight the Texas Department of Insurance in various courts, allowing them to keep charging what state regulators say are inflated rates for their policies.
The companies argue that the state is overstepping its authority and trying to deny them the ability to have sufficient reserves for the massive weather-related losses that regularly plague Texas.
Watching from the sidelines – for now – is House Insurance Committee Chairman John Smithee, who has been discouraged by the legal tactics of insurers and the failure of insurance prices to come down significantly for many homeowners. He estimated that the cost of many policies is still at least 7 percent to 12 percent too high.
"Lawyers for insurance companies have been very creative in finding ways to not comply with the law," said Mr. Smithee, an Amarillo lawyer and Republican who sponsored the 2003 reform law. "You can draft a statute very carefully, but they [insurers] have the best lawyers in the business trying to work around the law."
Mr. Smithee said legislators need to find a way to strengthen the law in their next session, or "This will come up again and again in the future, particularly if Allstate or State Farm is successful in their litigation."
He also acknowledged that the regulatory approach set up under the 2003 law – the so-called file and use system – has not work as well as lawmakers hoped.
Under the system, insurers can start using the higher rates for auto and home coverage once they have notified the insurance department. The insurance commissioner has authority to review the new rates and can reject them if they are excessive – subjecting the company to refunds and penalty interest.
That is exactly what Insurance Commissioner Mike Geeslin did last month when he cancelled Allstate's proposed 5.9 percent statewide rate hike. But Allstate went to court, getting a temporary restraining order against the insurance department that allowed Allstate to keep charging its higher rates.
"The rates we implemented were accurate and actuarially justified," insisted Allstate spokesman Bill Mellander. "We have been acting well within the bounds and spirit of the law."
Further, he added, "You don't have to be a meteorologist to see we are living in an increasingly prolific environment of catastrophes. In the last month, Texas has seen landfall of a hurricane, a tropical storm and the near miss of another hurricane."
The two sides will return to state court in Travis County in early October.
4-year fight
State Farm has been locked in a legal fight with the insurance department for four years after the state's largest insurer ignored an order from the commissioner to cut its "excessive" rates by 12 percent. No end to the standoff is in sight.
Mr. Smithee said the Legislature needs to give more power to the commissioner to counteract the extensive legal resources of big insurance companies. He hopes that will happen when insurance regulation comes under scrutiny next year as lawmakers draft "sunset" legislation to revamp and renew the insurance department.
"The industry will have to deal with a lot of issues they have not been dealing with in recent years," he said. "They will be fair game when we consider the sunset bill."
Lt. Gov. David Dewhurst, a strong backer of the 2003 reform law, said he still believes it has been good for consumers and "created a healthy, competitive marketplace that is attracting new insurers to Texas."
"Companies that try to charge excessive rates are finding it won't be tolerated, and I will continue to watch the industry closely and take whatever action is necessary to keep rates low and insurance affordable," he said.
Mr. Smithee and industry observers say increased worries that another major hurricane, similar to Katrina or Rita, will hit the Texas coast is a factor in keeping insurance rates too high.
Insurers have been reducing their business along the Texas coast to lower their exposure to a hurricane, forcing homeowners there to buy coverage from the Texas Windstorm Insurance Association. The TWIA is the "insurer of last resort" set up by the state to provide windstorm and hail coverage for homeowners in the 14 coastal counties who can't get protection from private companies.
While the TWIA collects premiums on its policies, it currently is able to cover only $1.8 billion in potential property losses from a hurricane – a fraction of the $58 billion worth of property that TWIA insures up and down the coast. Should its losses exceed $1.8 billion, insurance companies will be required to cover additional damages based on their market share in Texas – though they can eventually recover those payments through premium tax credits.
That potential liability has kept some insurance companies from expanding their business in the state and kept other companies from entering the Texas market, according to Mr. Smithee. That has resulted in less competition among insurers – and less desire to lower prices to get new customers.
"We have not had the influx of new policies we thought we would have," Mr. Smithee said. "As a result, home insurance rates have remained artificially high. Companies don't want to expand in Texas because of the risk they would have to take on the coast."
Consumer groups have grown impatient with the protracted litigation between big insurers and state regulators.
"This whole, sad state of affairs is exhibit A in the case for stronger, stricter oversight of insurance companies," said Alex Winslow of Texas Watch, a consumer group active in insurance issues.
"Big insurers are exploiting a loophole in the law as they continue to try to bully the insurance department," he said. "We need a new regulatory system that gives the commissioner authority to approve insurance rates before they go into effect. It is time to have prior [state] approval before insurance rates can be imposed on policyholders."
Regulation questioned
Industry representatives argued the state needs less, not more, regulation of rates.
"There is not enough competition in the insurance market because companies are reluctant to enter a state that can require prior approval of rates," said Jerry Johns, president of Southwestern Insurance Information Service, referring to two current orders by Mr. Geeslin that bar Allstate and State Farm from raising rates further without prior approval.
Mr. Johns also rejected the claim that insurers are using loopholes to get around state regulation, saying they are entitled under the law to contest orders they don't agree with. "It doesn't send a good message when an insurer can't get rates sufficient to pay the claims of customers," he said.
Mark Hanna of the Insurance Council of Texas said state regulators need to remember that the primary mission under state law of the Texas Department of Insurance is "to maintain the solvency of insurance companies that do business in Texas. That means that companies must have adequate reserves on hand and charge appropriate rates to cover claims."
He said homeowner rates have fallen for most customers since 2003, and the number of complaints against insurance companies also has dropped each year since then.
"Unfortunately, Texas remains prone to devastating weather conditions," he added, citing the reason for some insurers to increase their rates.
Oriinally published in the Dallas Morning News on September 16, 2007.
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