California Court Allows Policyholders To Question Farmers’ Fees

A California Court of Appeals has allowed policyholders in the Farmers Insurance Exchanges to question alleged excessiveness of management fees charged to them by Farmers Group Inc., a wholly owned subsidiary of Zurich Financial Services.

In Benjamin J. Fogel, et al.,v. Farmers Group Inc., et al., the plaintiff holds automobile, homeowners, and umbrella insurance policies issued through Farmers Insurance Exchange, Fire Insurance Exchange, and Truck Insurance Exchange (collectively the Exchanges).

The Exchanges are reciprocal insurance exchanges, which according to court documents, are “‘an unincorporated business organization of a special character in which the participants, called subscribers … are both insurers and insured; for their mutual protection, they exchange insurance contracts through the medium of an attorney in-
fact.'”

In August 2003, Fogel, on behalf of all policyholders of the Exchanges, filed a class action lawsuit against Farmers (which Fogel alleged was the attorney-in-fact for the policyholders of all three Exchanges) and the Exchanges. The original complaint alleged that the Exchanges required all policyholders to appoint FGI as their attorney-in-fact and that FGI breached its fiduciary duty to the policyholders and committed fraud by, among other things,
charging excessive fees. The original complaint also alleged that FGI and the Exchanges engaged in unlawful and/or unfair business practices within the meaning of Business and Professions Code section 17200 et seq., based upon two practices — the Exchanges’ requiring policyholders to appoint FGI as their attorney-in-fact and FGI’s charging excessive fees — as well as other conduct.

The class action suit filed in 2004 by Fogel claims that FGI and its subsidiaries paid themselves more than $4.5 billion in fees in the 2000 to 2002 time period, resulting in at least a 43 percent profit over the costs of the services that FGI provided the policyholders. Fogel sought disgorgement of all excessive fees charged from 1999 to the present and an injunction against future excessive charges.

However, the defendants emphasized that FGI, doing business as Farmers Underwriters Association, was attorney-in-fact only for Farmers Insurance Exchange policyholders, and that Truck Underwriters Association and Fire Underwriters Association serve as
attorneys-in-fact for policyholders in Truck Insurance Exchange and Fire Insurance Exchange, respectively. According to court documents, “One of the other arguments they made in the motion was based upon the form ‘Subscription Agreement’ that defendants asserted each of the policyholders signed when they applied for insurance.” Each agreement provided that the relevant entity was appointed as the policyholder’s attorney-in-fact, described the scope of its power to act on behalf of the subscriber, and stated that the subscriber agreed that the entity would collect a certain percentage of the premium as compensation for acting as attorney-in-fact. The defendants argued that FGI did not breach its fiduciary duty because it was undisputed that it collected less than 20 percent of the premiums as fees during the period at issue.

The recent court of appeals ruling rejected FGI’s argument that the fees had been approved by the California commissioner of insurance as part of the rate requests FGI files on behalf of the insurance exchanges it manages. The court held that FGI and its subsidiaries owe a fiduciary duty to the Exchanges’ policyholders and must answer allegations that it has overcharged them for its services by several billion dollars since 1999.

“We hold that neither Walker, section 1860.1, nor the filed rate doctrine apply to this lawsuit against the attorneys-in-fact, because the attorneys-in-fact are entities distinct from the exchanges, with fiduciary relationships with each of the subscribers. Accordingly, we reverse the summary judgment in favor of the attorneys-in-fact and direct the trial court to enter an order denying defendants’ motion and granting plaintiff’s motion to summarily adjudicate defendants’ exhaustion of administrative remedies
affirmative defense,” the court of appeals said.

Acting Presiding Justice Thomas L. Willhite Jr. issued the ruling which was concurred in by Justice Nora M. Manella and Justice Steven C. Suzukawa of the California Court of Appeal, Second District, Division 4, Los Angeles.

Fogel was represented by Austin attorneys Philip K. Maxwell and Joe K. Longley, and Los Angeles attorneys Tom Girardi and Walter Lack.

FGI was represented by Raoul D. Kennedy of Skadden, Arps, Slate, Meagher & Flom LLP, San Francisco.

Sources: California Courts, Law Offices of Philip K. Maxwell