I was going to write on the fascinating topic of errors and omissions aspects of 100 percent coinsurance penalties, but the response to yesterday’s Post, Should the Rust Family Stay in State Farm’s Power and Ownership Given the Recent Record of Policyholder and Corporate Citizen Ethics, requires some follow up.

I found an editorial, "State Farm’s Rate Case Mocks Insurance Regulation," in the Dallas Morning News on June 19, 2009, that shows State Farm is treating Texas similar to the way it is treating Florida. The editorial stated in part:

“State Farm is masterful at working the legal system. For six years, it has danced in and out of court to thwart the Texas insurance department’s order to refund millions to policyholders in alleged overcharges.

State Farm says it has done nothing wrong and owes nothing. However, the Office of Public Insurance Counsel, a state-funded advocate for consumers, pegs the refund at about $1 billion. The state insurance department’s staff, whose commissioner, Mike Geeslin, eventually will decide who’s right, puts the cost at $350 million.

One wonders whether there is any real accountability for a big insurance company when its rates are called into question. Before insurance reform a few years ago, insurers complained of lengthy regulator reviews that prevented them from charging new rates in a timely fashion. So lawmakers loosened the reins and set up an appeals system that they thought insurers would accept in good faith. Instead, the result is marathon stonewalling.

State Farm’s action is a blatant challenge to the state’s authority to regulate rates. If the company prevails, no other major insurer whose rates are called into question will ever again settle outside a courtroom. For instance, Farmers Insurance recently filed for a rate hike. Anyone believe that if its rate request is rejected, Farmers will roll over quietly?”

Sounds like Florida. Fortunately, the administrative and judicial reviews of State Farm’s rate increases have been relatively swift in Florida. The judge ruled that the economic justification for the rate was essentially based on a “sham’ transaction of State Farm Florida paying an “expense” of $549 million to State Farm Mutual, its parent company. I bet we all wish we could use such a technique to claim an “expense” for tax purposes. We would end up with the same amount of money, but no income to show.

State Farm is not embarrassed by their dishonesty and claims to be losing money in Florida. There has not been a major hurricane in Florida since 2005. All the little insurance companies are making money. State Farm has dropped its most risky accounts and is insuring the less risky properties. How can it be losing money– unless it is totally incompetent at its business or it is simply not telling the truth?

Remember in my recent post The Obligation of Good Faith Claims Handling and Policyholders’ Perceptions of Why it Does Not Happen, where I gave an example of honesty and transparency with this hypothetical:

Could you imagine what would happen if a wife asked her husband, "Honey, where were you," and one of two answers were given:

  1. "I am not going to tell you where I was because there is no law or regulation that says I have to tell you."
  2. "I stopped by the Alibi Lounge to have a drink with the guys." Which may have been true, but only after also seeing "my girlfriend" for an hour outside the lounge.

State Farm is lying when it says State Farm Florida is nearly insolvent and must take drastic steps. It is failing to tell the truth about where the money goes to and how only it counts paying money to itself is an expense. Here is State Farm’s explanation in yesterday’s St. Petersburg Times article, “State Farm Wants More:”

“State Farm Florida, the largest private property insurer in the state, has said its net worth is dwindling quickly as it spends $2 on claims and expenses for every dollar in premiums brought in.

In the wake of Hurricane Andrew in 1992, State Farm’s Illinois-based parent shielded itself from losses in hurricane-prone Florida by setting up a separate Florida-based entity. State Farm Florida says its net worth is about $500 million, a decline of about $300 million in the past 18 months.

The company plans to continue offering auto insurance and some other lines in Florida. But if it continued offering property insurance here for the long haul, the company maintains, it’s on a path to running out of money.

Cutting discounts "would hopefully allow the company to remain solvent through the withdrawal plan," Neal said."

Did you see anywhere in the statement that State Farm Florida sent $549 million to State Farm Mutual? State Farm Florida could become insolvent today if it transferred all of its money to State Farm Mutual. While they may be different corporations for legal purposes, they really are not for practical and substantive purposes. They are one and the same from an ultimate ownership and management purpose, and we all know who runs the show in Bloomington.

Its statement that it is paying out $2 for every dollar it takes in is very misleading. Some may think that the $2 is going to policyholders and claimants. It is not. Over a half billion dollars went to State Farm Mutual’s bank account. Any dishonest insurer could do this—set up a parent corporation, and have the operating company pay “re-insurance expense” to it. It could then claim that rates have to go up more because they are not making any money. This is a sham.

Interestingly, Florida Senator Mike Fasano did not take State Farm’s recent tactic lightly.

“State Sen. Mike Fasano, R-New Port Richey, called the filing an "outrageous" way of "going around the law" to raise premiums without a formal rate increase. "The insurance companies always seem to find a way to help themselves and neglect the homeowner," he said.”

Texas and Florida are two of the largest states in the Union. Their insurance departments are not small in comparison to other states. The problems in the Lone Star State and the Sunshine State are not very dissimilar when it comes to dealing with this very large and powerful insurer from the north. I have no idea what they teach for economics and accounting in Illinois, but this Florida Gator knows what it means when you shift money from one pocket into another. I do not think the Longhorns and Cowboys are fooled either.