Did Farmers Insurance Keep Secrets From the State?

An internal Farmers Insurance Group memo, obtained by the Chronicle, suggests the insurance company tried to keep "troublesome" claim files away from state officials investigating the business practices of Farmers and other industry giants for more than a year -- possibly avoiding state scrutiny into how claims were being handled.

In the March 11, 2002, memo, from Austin attorney Thomas Rogers of Jackson Walker to Tony Melchionne at Farmers' National Catastrophe Center in Kansas, Rogers writes that while reviewing various insurance claim files in preparing to respond to a "civil investigative demand" made by the Texas attorney general in January 2002, Rogers discovered "a variety of problems in the handling" of individual claims. "The [AG's] Consumer Protection Division is focusing its investigation on the individuals named in the [civil investigative demand], and I do not expect that they will be raising any issues with Farmers regarding the handling of individual claims," Rogers wrote.

Former AG (now U.S. Sen.) John Cornyn filed suit against Farmers in August 2002, charging the company with a host of violations of state law against deceptive trade practices -- including overcharging for homeowners insurance policies and unfair use of credit scoring, which allegedly also led to inflated premiums. After months of legal wrangling -- including a challenge brought by several individual policyholders -- state officials in May announced they had negotiated a $117.5 million settlement with the company, to be paid to policyholders through "combined savings and restitution," according to a Texas Department of Insurance press release. "This court ruling is great news for Farmers policyholders, the Texas insurance market, and all Texas consumers," TDI Commissioner Jose Montemayor said on May 22.

That suit did not involve allegations regarding Farmers' handling of individual policy claims. And, according to Jeffrey Beyer, Farmers chief communications officer, Rogers' memo was written to the insurance company in response to a separate and prior investigation into fraudulent mold-related claims submitted to Farmers. "The documents that your inquiry concerns appear to stem from an investigation by the [AG] into the allegations that fraudulent insurance claims were being submitted to numerous insurance companies -- including Farmers -- by mold remediators, public adjusters, lawyers and others," he wrote in a Nov. 11 response to the Chronicle. "Farmers was not the subject of the investigation by the Texas Attorney General."

Still, the internal memo penned by Rogers suggests that Farmers withheld information that could have raised questions about their claims handling practices -- which in turn could have led to a state inquiry on that issue. In the memo, Rogers wrote that his firm was withholding the "more troublesome" claims -- suggesting the company should play the odds that the AG wouldn't make any further inquiries. "Farmers does not have a choice but to respond to the Civil Investigative Demand, and does not have a choice to refuse production of the claim files involving the individuals named in the CID," Rogers wrote. "Accordingly, what we have endeavored to do here is furnish a sample to the Consumer Protection Division, leaving out the more troublesome files." As the investigation continued, Rogers warned, "it may well be that Farmers will be required to produce additional claim files, including those with very obvious problems." (Read the complete Rogers memo.)

Rogers declined to comment on the memo, beyond claiming that the document is protected by attorney-client privilege and asking us not to publish it. TDI spokesman Jim Hurley declined to comment on the content of the memo, citing pending litigation. Several legal issues regarding Farmers and other insurers are still in the courts, including a legal challenge to the state's settlement brought by a handful of individual policyholders, who are represented by attorney Joe Longley, and who contend the settlement isn't in the best interest of Texas' policyholders. (That case is scheduled for oral arguments before Texas' 3rd Court of Appeals on Dec. 15.) As well, major insurers are suing the state over the mandatory rate rollbacks instituted by Montemayor after passage of Senate Bill 14 last spring. A spokesperson from the Texas attorney general's office had not responded by press time to inquiries into what documents the AG received from Farmers.

Dan Lambe, executive director of the watchdog group Texas Watch, said the idea that claims information was withheld is "outrageous" and yet not all that surprising. "It's the lack of prompt and proper claims handling that got us into the current insurance crisis in Texas," he said. Indeed, even Rogers acknowledges in his March 11 memo that the claims situation isn't unique to Farmers. Even if the AG were to require Farmers to produce all the files covered by the CID, he opined, state officials "will learn that Farmers' handling of the tremendous volume of water damage claims does not differ materially from what other [insurance] carriers are experiencing."