Texas judge tells State Farm to pay millions to customers State Farm is told to pay $350 million

Judge rules Texas customers were overcharged

State District Judge Tim Sulak found that state Commissioner Mike Geeslin acted properly when he ordered State Farm Lloyds, the company's homeowners subsidiary, to reimburse an estimated 1.2 million customers for overcharges as well as penalty interest.

"There is substantial evidence to support the commissioner's decision, and the decision is upheld," Sulak said. He ruled quickly after listening to two hours of oral arguments from attorneys for State Farm, the Texas Department of Insurance and the Texas Office of Public Insurance Counsel.

State Farm indicated it would appeal the ruling, the latest twist in a case that has dominated debate over the state's insurance market for nearly a decade.

"We knew no matter which way the judge ruled, an appeal from either party was highly likely in this case," said Kevin Davis, a spokesman for the company. "State Farm Lloyds' rates are, and always have been, fair and competitive - and we remain confident the commissioner's order will be reversed."

The Insurance Department and the state public insurance counsel, who represents consumers' interests, say that State Farm continued to overcharge customers for several years despite warnings from regulators that rates were too high. Public Insurance Counsel Deeia Beck has argued that the company should be on the hook for nearly $1 billion.

Attorneys for State Farm contend it owes nothing and has charged premiums for the past several years that were competitive with other companies. The dispute is over premiums charged for homeowners coverage between 2003 and 2008.

$200 to $300 refunds?

The commissioner's order for refunds was handed down in November 2009. In it, Geeslin called on State Farm to either issue refund checks or provide a credit on policy renewals. Refunds for longtime customers were expected to range between $200 and $300.

Geeslin, who has been battling the state's largest insurer throughout his tenure, welcomed the decision.

"Simply explained, the 2009 order is a function of law and evidence, and the court agreed that there was substantial evidence in support of its findings," he said. "This is a major step toward bringing this issue to a conclusion."

During oral arguments before Sulak on Monday, State Farm attorney Susan Conway said the refund ordered by Geeslin would wipe out a third of State Farm Lloyds' capital and threaten the finances of the state's largest property insurer.

'Disastrous'

"This refund would be disastrous and irresponsible," she told the judge. "The commissioner failed to consider the impact the refunds would have on the financial stability of State Farm Lloyds."

However, a new report from the Insurance Department indicates that State Farm had a very profitable year in 2010, after paying out just 52 percent of its premiums to cover property losses. The 52 percent "loss ratio" was close to the state average of 48.4 percent for the 20 largest companies and significantly better than the 60 percent loss ratio that is considered a benchmark for profitability in Texas.

Last year, State Farm Lloyds collected nearly $1.7 billion in homeowners premiums in Texas.

Suggests a motive

Conway also suggested that the commissioner levied about $53 million in penalty interest against State Farm because it appealed his rate decisions - including his initial finding that State Farm was overcharging customers by 12 percent.

Beck argued that State Farm had a choice in the matter - to reduce rates as the commissioner ordered or continue to charge excessive rates.

A leading consumer group, Texas Watch, said the judge's ruling in the nearly 8-year-old legal battle points to one conclusion: State Farm needs to pay up.