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Farmers Group Inc. will begin dropping its 700,000 homeowners insurance customers in Texas on Nov. 11 as the debate continues over whether the insurer is the villain or the victim in an ongoing legal battle with the state. With Texas Gov. Rick Perry by his side, Attorney General John Cornyn announced Aug. 5 that the state was suing Farmers for alleged deceptive trade and discriminatory practices in Texas. Eight days after Cornyn filed the suit, State Insurance Commissioner Jose Montemayor filed an emergency cease-and-desist order against two Farmers subsidiaries, saying that he would seek $150 million for alleged overcharges caused by the insurer’s allegedly unfair or deceptive acts. Under that order, Farmers could face civil penalties of $25,000 for each alleged violation, although Montemayor gave the company 90 days to come into compliance. Farmers, based in Los Angeles, announced in September that it has done nothing wrong and would leave Texas. Starting Nov. 11, Farmers will not renew expiring homeowners’ policies, and customers will have to find coverage elsewhere. “These cases are without merit and appear to be politically inspired,” alleges Farmers’ attorney Gerard G. Pecht, a partner in the Houston office of Fulbright & Jaworski. Democratic challenger Tony Sanchez has repeatedly blamed the insurance rate crisis on Perry and attacked the governor for taking large campaign contributions from the insurance industry. Jay Thompson, an Austin attorney who frequently defends insurance companies, alleges that the Texas Department of Insurance is using the cease-and-desist order and the suit to create new law and punish Farmers for violating it. “They’re making up the rules as they go,” alleges Thompson, a partner in Thompson, Coe, Cousins & Irons. Pecht, who declines further comment on the litigation, isn’t the only one claiming that politics may be behind the state’s legal actions. D.J. Powers, president of the Center for Economic Justice, a consumer rights organization, says he’s no friend of Farmers but that the insurer is being used as a “political whipping boy” in a suit that he predicts the state won’t pursue after the election. “There’s one goal in the lawsuit, and that is to save the governor’s campaign,” Powers, a former general counsel for the Texas Department of Insurance, alleges. “I fully expect after the elections they [state officials] will cut some deal with Farmers,” he adds. Although Cornyn and Perry held the news conference to announce the suit in Houston, State of Texas v. Farmers Group Inc. was filed in the 261st District Court in Austin. Powers alleges the suit was announced in Houston to garner the attention of more voters. Representatives from the Perry and Cornyn campaigns did not return calls seeking comment by press time. In an op-ed piece published on Aug. 11 by the Austin American-Statesman, Powers criticized a decision by Perry and Cornyn not to seek a temporary injunction to stop the practices alleged in the suit. He also questioned why Perry didn’t have Montemayor issue an immediate cease-and-desist order to stop those alleged practices. Two days after the op-ed piece appeared, Montemayor issued the cease-and-desist order. Powers alleges that politics again played a role. But Karen Barratt, chief of the enforcement section in TDI’s legal and compliance division, says politics aren’t involved. “It doesn’t have anything to do with politics; this had to do with making sure companies play by the rules,” Barratt says. Barratt says Montemayor ordered Farmers to stop using certain pricing practices after TDI received numerous complaints from people who can’t afford the company’s increased rates. The order alleges that Farmers has overcharged its policyholders for HO-A coverage. Barratt says an HO-A policy is a form of homeowners’ coverage that generally doesn’t include mold or water damage coverage. However, Barratt says she can’t discuss specifics of the allegations against Farmers because Judge Scott Jenkins of Austin ruled that certain information obtained from the insurer is confidential. Jenkins, presiding judge of the 53rd District Court in Austin, signed an order on Oct. 28 that granted, in part, a temporary injunction sought by Farmers to protect what it claims are trade secrets. A fact sheet issued by TDI on Aug. 13 states the cease-and-desist order prohibits Farmers from engaging in allegedly unfair practices that have inflated premiums for its HO-A policy. Among other things, Farmers fails to provide accurate discounts based on credit-scoring categories, TDI alleges in the fact sheet. Farmers filed a suit on Aug. 30 in the 353rd District Court, asking the court to find that TDI lacks statutory authority to issue the emergency order or pursue disciplinary action against the company based on the practices addressed in the order. The insurer also asks the court in Farmers Insurance Exchange v. Montemayor to find that there was no “emergency” that justified the issuance of the order without notice and a hearing. Barratt says the commissioner has the authority under Texas Insurance Code Article 21.21, � 3 to determine that certain practices in the business of insurance are unfair. In its motion for summary judgment, TDI alleges that Farmers has increased premiums by as much as 200 percent, even though the affected policyholders have substantially less coverage. But the practices for which TDI seeks to penalize Farmers apparently are not as yet prohibited by specific rules. “The rapid [rate] increases are a recent phenomenon about which the agency needs to gather more information before it can wisely promulgate rules for the entire industry … . TDI nonetheless has gathered enough information about Farmers’ particular prices to initiate the underlying enforcement action, and Farmers should not be allowed to derail that action just because no formal rule has yet been promulgated,” TDI says in the motion. ISSUES MEDIATED Dallas attorney Brent Cooper, who also defends insurance companies as a large part of his practice, believes TDI is trying to impose regulations against Farmers that aren’t on the books. Cooper, a shareholder in Cooper & Scully, alleges that Farmers is doing what it’s permitted to do under the current regulatory structure. If there are problems with the Insurance Code, the Legislature needs to look at it, he says. If TDI would allow the uniform forms developed by the Insurance Services Office in Cincinnati, Ohio, to be used for homeowners’ insurance, Texas would have fewer problems, Cooper says. The ISO forms are used in other states, he says. Cooper says Farmers operates as a reciprocal exchange that under Insurance Code Article 19.12 is exempt from insurance laws except as provided and is not rate-regulated. In effect, TDI is trying to tell Farmers what its rates should be, alleges Thompson. Mike Viesca, spokesman for Texas’ attorney general’s office, declines to comment about the case but cites statutes that Farmers allegedly violated. The state alleges in the suit that Farmers’ use of credit histories to determine homeowners’ premiums and its practice of offering different discounts based on the age of a home are discriminatory, violating Insurance Code Article 21.21-8. The statute prohibits an insurer from charging different premiums to individuals of the same class who represent essentially the same risk. Thompson says insurers aren’t required to offer any discounts and questions how TDI can determine the amount of discount an insurance company offers. The suit alleges that Farmers’ failure to adequately disclose that it uses a nationwide and Texas-based catastrophe load — a component used to determine insurance rates based on losses from natural disasters — constitutes misleading, deceptive practices under Insurance Code Article 21.21, � 4(2) and violates � 1746 of the Deceptive Trade Practices-Consumer Protection Act. “There’s no duty to disclose that,” says Thompson, who served as a consultant to Farmers in its request for an injunction to keep data confidential. Thompson says the “cat load” is just one component that might be in a rate. It never has been the law that policyholders must be told what the components of the rate are, he says. The suit also alleges that Farmers’ failure to adequately disclose its management fee arrangement constitutes a misleading, deceptive act, but Cooper says there is no duty to disclose the management fee. “Basically, they’re suing Farmers to disclose something they’re not required to disclose,” he says. Two Texas state senators, Robert Duncan, R-Lubbock, and Troy Fraser, R-Horseshoe Bay, volunteered in early October to try to mediate the issues between Farmers and the state officials. Duncan, a partner in Lubbock, Texas’ Crenshaw, Dupree & Milam, says he’s hopeful that some, if not all, the issues can be resolved to prevent Farmers from leaving the state. But so far, a resolution isn’t in sight, he says. Notes Duncan: “Just like in any litigation mediation, we take steps forward, and we take steps back.”

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