N.D. Regulator Fines Farmers $750,000

Farmers Insurance Group has been fined $750,000 for allegedly setting up incentives for auto insurance adjusters to underpay some claims and deny others, Insurance Commissioner Jim Poolman said.

The fine is the largest the Insurance Department has ever imposed, Poolman said. State law requires the money to go into the state’s general treasury. It will not be used to compensate customers, and Poolman said he was unsure how many had been shortchanged.

“It was to take a piece of their hide, basically, for treating policyholders unfairly,” Poolman said last week. “We felt … the program was egregious enough, and the penalty was appropriate.”

Mark Toohey, a spokesman for Farmers, said the company denies Poolman’s allegations. Toohey said Poolman did not find any evidence that individual customers were harmed, and the company agreed to pay the settlement to get the dispute out of the way.

“The most important issue here is that we have full faith and utmost confidence that our customers’ claims have been paid properly,” Toohey said.

Poolman said an Insurance Department investigation, which began in August 2004, uncovered evidence that Farmers had quotas for denying vehicle insurance claims, and referring others for fraud investigations.

The Los Angeles-based company also settled injury claims using a predetermined range of payments, rather than examining each claim’s own merits, Poolman said. If adjusters did not follow the company’s guidelines, they could see cuts in their own paychecks, he said.

“We felt that Farmers’ programs created a natural, inherent bias against policyholders,” Poolman said. “When a person is either punished or incentivized by shortchanging the policyholder in how they pay a claim, that, in my opinion, is a violation of (state law).”

Farmers Insurance Group sells about $11 million worth of car insurance to North Dakota policyholders each year, which ranks it as the third-largest vehicle insurer in the state, Poolman said. He could not say how many North Dakota customers the company has, but said the number was “in the thousands.”

A state Insurance Department report on the investigation said Farmers had begun an effort in 1994 to rebuild its financial reserves after a series of natural disasters, including a California earthquake near Northridge in January 1994. Its efforts included special employee programs targeted at cutting claims payments, the report said.

“A potential conflict of interest was created between meeting these goals and effectuating a prompt, fair and equitable settlement of each individual claim on its merits,” the report says.

Toohey said Farmers disagreed with the Insurance Department’s interpretation.

“We strongly believe that our employee programs are now, and always have been, in compliance with state insurance laws,” he said.

Poolman said the Insurance Department did not examine individual claims for evidence they may have been mishandled. He said the number of customer complaints against the company in recent years has not been unusually high.

If customers who learn of the Insurance Department’s investigation believe Farmers may have handled their vehicle claims unfairly, the agency can investigate those complaints, Poolman said.

The $750,000 fine is by far the largest the Insurance Department has ever levied, Poolman said. The agency has previously fined two insurers $50,000 each, for accidentally disclosing confidential customer data and overcharging customers who were covered by both private insurance and Medicare.