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A judge’s ruling on Jan. 6 keeps alive Farmers Group Inc. policyholders’ efforts to intervene in a proposed class action settlement that would end the state’s suit against the insurer and allows the policyholders to question the people who negotiated the deal. Judge Scott Jenkins of Austin, Texas’ 53rd District Court denied Farmers’ motion to strike the intervention and also denied motions by the insurance company and the state to quash subpoenas for state Insurance Commissioner Jose Montemayor; John Hageman, Farmers’ state director in Texas; and staff members at the Texas Department of Insurance and office of the attorney general. David Burrow, who represents policyholders Gilberto Villanueva and Michael Paladino in their plea to intervene and object to the proposed settlement in Texas v. Farmers Group, says Jenkins’ order “gives us the right to ask any questions we want to ask” about the settlement. “We want it to be aired out in the open how this was negotiated,” says Burrow, a partner in Houston’s Burrow & Parrott. After weeks of private negotiations, officials for the state and Farmers announced on Nov. 30, 2002, that they had reached a settlement valued at $100 million in the suit that the office of the attorney general had brought against the insurer in August. Farmers announced in September that it would pull out of the Texas market. In its original suit against Farmers, the state alleged deceptive trade and discriminatory practices in the company’s insurance for homeowners in Texas. On Dec. 18, 2002, the office of the attorney general filed an amended petition alleging deceptive, misleading and discriminatory practices in Farmers’ automobile insurance as well, and added five auto insurers to the list of defendants. The petition also asks to bring the claims as a class action. Jeff Boyd, deputy attorney general for litigation, says the main reason the office of the attorney general is seeking the settlement as a class action is to make sure all the people affected by the settlement will have an opportunity to say if they don’t like it. “We’re bending over backward to do this in a way that is subject to scrutiny,” he says. According to Boyd, the settlement will receive more scrutiny as a class action than it would as a deceptive trade practices action. Burrow contends that a settlement under the Deceptive Trade Practices Act would provide policyholders more protection. Charles Silver, a University of Texas School of Law professor who teaches civil procedure, says the state can’t release all claims against Farmers. “But if it gets a judgment as a class action, that extinguishes the claims of all individuals,” Silver says. “They’re helping Farmers to prevent actions against Farmers by use of a class action device,” alleges Joe Longley, an attorney for Jan Lubin, another policyholder seeking to intervene in the case. Boyd says policyholders will receive notice of the terms and can opt out of the settlement if they don’t like it. The state can terminate the settlement if 2 percent of the policyholders object to it, he says. Burrow says the 2 percent objection provision applies only to policyholders eligible for the prospective rate reduction, which expires on Aug. 31, 2003, and those who qualify for individual discount adjustments. Silver says it was once easy to get class certification for settlements only, but that court rulings in recent years could make the process more difficult. Silver says the Texas Supreme Court’s Oct. 31, 2002, decision in Schein v. Stromboe requires a trial plan for class actions, even if they involve only a settlement. But a trial plan would provide a map that Farmers’ opponents could use to sue the company, he says. Farmers’ attorney Gerard G. Pecht, a partner in the Houston office of Fulbright & Jaworski, says Schein isn’t applicable in this case. Longley says a settlement usually comes as a result of a class action. “This has become a class action because of the settlement, not the other way around,” he says. Class actions usually involve discovery and a number of interrogatories, says Longley, a partner in Austin’s Longley & Maxwell. “Here they haven’t even sent out interrogatories. How do they know what the case is worth?” Longley asks. “Jan Lubin and her lawyers only brought their suit after the attorney general’s settlement had already been announced. They are attempting to obtain a free ride on the coattails of the attorney general,” Pecht alleges. Longley says Lubin, a homeowner’s insurance policyholder with Farmers, filed her petition to intervene in the settlement and a class action on Dec. 11, and Villanueva and Paladino, auto insurance policyholders with the company, filed their petition later on the same day. “Because we filed our class action first it appears the attorney general is trying to piggyback on Jan Lubin’s class action,” Longley says. “We’re happy to proceed with or without the attorney general.” The intervening policyholders allege in their petitions that the state, “as the ostensible representative of the class members,” cannot and has not adequately represented the interests of all potential members of the class. “It looks to me that the important thing they [state officials] were trying to do was to keep Farmers in Texas,” Burrow alleges. The proposed settlement does not require that Farmers admit to any of the violations alleged by the state. In its suit, the state alleged that Farmers discriminated by using credit histories as a significant factor in setting premiums without adequately disclosing to policyholders the adverse impact of that practice. It also alleged that Farmers’ practice of basing discounts on the age of policyholders’ homes was discrimination because the company’s own loss analyses often showed that higher discounts were warranted. Another of the state’s allegations focused on the management fee arrangements Farmers had with certain subsidiaries. Although the state alleged in the suit that Farmers’ failure to adequately disclose the management fees to policyholders constituted a misleading and deceptive act, the fees aren’t addressed in the settlement. However, Lubin seeks full forfeiture of the management fees in her petition. Jenkins had been scheduled to hear arguments on the settlement at the Jan. 6 hearing, but the state withdrew its motion for preliminary approval. “There were still t’s to cross and i’s to dot,” Boyd says, noting that some “actuarial crunching” is still going on. No date has been set for the next hearing.

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