La. Suit Challenges State Farm’s Conversion of Homeowner Policies

May 17, 2005

Two State Farm Insurance Co. customers have filed suit, claiming the company illegally converted the homeowner policies of hundreds of thousands of Louisiana residents in ways that effectively raised their rates and reduced their coverage.

The state district court suit by Thomas Moore Jr. and Kenneth Carroll asks for up to $400 million in damages to the 300,000 customers they say have been affected by the conversion since it was implemented in February.

The suit also names two State Farm subsidiaries and the state as defendants.

At issue is a plan by State Farm to consolidate several classes of homeowner policies into one class. The company has been making the change nationwide during the past few years to give its customers more flexibility, said State Farm spokesman Morris Anderson.

Traditionally, State Farm has required homeowners to choose from a list of available policies the one that was closest to fitting their needs. But by converting the policies into one plan, the company believes it is better able to offer customers ways to tailor the plan to their specific needs, Anderson said.

State Farm sought approval from the state insurance department in 2002 to convert Louisiana’s policies to the new policy but was denied because the conversion plan conflicted with a Louisiana law that prohibits insurers from canceling or not renewing homeowners policies, said Tom Donelon, executive counsel for the Department of Insurance.

Although State Farm was given permission to sign up new customers for the policy as well as those homeowners who had consented to the conversion, the majority of State Farm’s clients remained under their old policies.

Under legislation approved last year, State Farm was able to begin converting the policies with the approval of the insurance commissioner in February.

Moore and Carroll argue in their lawsuit that of the two laws prohibiting conversions, the bill amended only one, which means that it is still technically illegal to convert the homeowners policies.

“The law in Louisiana since 1992 has been that homeowner policies in effect for three years or more may not be canceled or nonrenewed,” said plaintiff attorney Tom Thornhill.

The lawsuit also argues that even if the policy changes were legal, State Farm erred when it did not receive the approval of the Louisiana Insurance Rating Commission before instituting the changes, a move Thornhill said was designed to hide rate increases.

Last month, Thornhill and State Farm argued that point before the rating commission. State Farm said it did not need the commission’s approval because the conversion was revenue neutral.

“It’s a conversion,” Anderson said. “But there was no rate increase caused by the conversion.”

Thornhill argued that although the dollar value of the rates did not increase, in some cases, coverage declined. Clients attempting to maintain the same level of coverage have been forced to pay 25 percent to 30 percent more, he said.

Instead of ruling, the commission plans to ask for a state district judge, in a separate lawsuit, to decide whether it should have been given a chance to review the policy conversions.

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