You would never know by watching the nearly ubiquitous television commercials announcing State Farm Insurance to viewers on a wide variety of television shows.
State Farm has fired the first shot in what could become a war on California home and apartment owners, a war with potential costs running into the billions of dollars. A week later, Allstate Insurance admitted that it had already joined.
State Farm’s strike came on May 26, when it announced to little fanfare that it had stopped taking claims for new property and casualty insurance in California due to extreme wildfire risks.
Worth noting: the company has been steadily writing new auto insurance policies, ensuring continued growth in the total premiums it collects from California. Additionally, neither State Farm nor Allstate sought clearance from Insurance Commissioner Ricardo Lara, which appears to be required under Proposition 103 of 1988.
“They can’t legally do it themselves,” said Harvey Rosenfield, the author of this proposal, the law that governs insurance rates in California. He also founded the Consumer Watchdog advocacy group. “Any refusal to write new policies will affect the fares people pay, and the commissioner must approve anything that affects fares.”
Giving a hint that this is really a pressure tactic, State Farm said it will work with the California Department of Insurance to eventually get back to business as usual. Translation: State Farm wants Lara to approve the $700 million in property insurance premium increases she is currently seeking. Allstate has similar goals.
However, Lara is constrained by Proposition 103, which limits what companies can charge. The measure has saved consumers more than $100 billion in premiums over its 35 years.
Insurance companies hate it, even with State Farm, California’s largest operator, collecting around $7 billion in property insurance premiums here every year and controlling nearly 9% of the market. Several other companies are also pushing for insurance rate increases, all saying wildfire risks justify almost any price.
At the same time, Lara said he wants companies to reduce homeowner policies that mitigate wildfire risk through measures such as fire-rated roofs and enclosed eaves. In a partial response, State Farm is boycotting the entire state, not just wildfire-prone areas.
If other big operators like Farmers, GEICO and Mercury follow the lead of State Farm and Allstate, it won’t be the first time this industry has boycotted California as companies felt profits were in jeopardy.
It also happened in the mid-1990s, when then-insurance commissioner Chuck Quackenbush, a former Republican assemblyman, acquiesced as the industry blacklisted California. The dispute then centered on a rule requiring companies selling home insurance to also offer earthquake coverage.
The companies refused, hurt by payments after the 1994 Northridge earthquake, and stopped selling new home insurance. Some companies (like the old 20th Century Insurance) canceled all home insurance policies when they expired. Several companies have recently resumed this practice in areas prone to wildfires.
Quackenbush, whose 1994 and 1998 elections were funded largely by insurance companies, could have responded by shutting down ultra-profitable auto insurance sales from any company refusing to sell property and earthquake insurance.
Its failure to act led the Legislature in 1996 to create the California Earthquake Authority (CEA), now the state’s primary earthquake insurer. To the immense good fortune of the CEA, a lull in very large earthquakes since 1994 has allowed for the accumulation of several billion dollars in reserves to pay claims if and when new large earthquakes occur.
The reality was that Quackenbush gave in to the companies. In 2000, he was forced to resign following an unrelated scandal. Eventually he became a sheriff’s deputy in Florida, where he served until 2016, but was again forced to resign, this time after posting controversial alleged racist comments on social media.
Quackenbush’s shameful precedent should guide Lara as he decides how much to award insurance companies in their current rate-raising cases. Rosenfield insists that Lara must approve little or none of these bounty increases.
“It’s excessive,” he said. “They don’t want to comply with Prop. 103. They pressure Lara to come with them despite the law. There’s no doubt that this is a pressure tactic, and Lara shouldn’t make their offer.
Thomas Elias can be reached at [email protected], and many of his columns are online at californiafocus.net.