State Farm wins first-ever emergency rate hike in California

State Farm can raise homeowner and other rates starting next month, becoming the first insurance company to win approval to do so on an emergency interim basis in California.

The state’s largest insurer made the unprecedented request for emergency rate hikes earlier this year, after it said it was in financial distress and expected more than $7 billion in claims because of the Los Angeles County fires in January.

The state Insurance Department staff recommended approval of the company’s request, but Insurance Commissioner Ricardo Lara asked the company for more information about its finances. He also asked whether the insurer could turn to its parent company, State Farm Mutual, for help. Lara then conditionally approved but punted the official decision to a judge, who oversaw a three-day public hearing last month to consider the proposed agreement between the department and the insurer.

“Taken as a whole, it represents a fundamentally fair, adequate, and necessary measure — effectively functioning as a rescue mission to stabilize State Farm’s financial condition while safeguarding policyholders,” wrote Karl-Fredric Seligman, the administrative law judge, in a 38-page decision released today.

The decision means State Farm can raise its rates an average 17% for homeowners, 15% for renters and condominiums, and 38% for rental dwellings starting June 1.

The approval comes despite calls for the insurance department to investigate complaints over State Farm’s handling of claims by victims of the L.A.-area fires. Those survivors and the lawmakers that represent them urged Lara to reject the company’s request to raise its rates, but the commissioner told fire survivors in a Zoom meeting over the weekend that the rate hike and the claims complaints were separate matters.

In his decision, the judge addressed the possibility that this first-of-its-kind approval could pave the way for other insurance companies to request emergency interim rate increases after other major fires. Seligman mentioned that State Farm still will be required to more fully prove its case for the original rate-increase requests it submitted last year, which will be considered in a full rate hearing next month.

“A full rate hearing serves as a critical signal to the marketplace that emergency rate requests of the type State Farm advanced are serious [and] will undergo rigorous scrutiny,” the judge wrote.

State Farm has promised to provide refunds to policyholders if after the full rate hearing the approved rates are lower than the interim rates.

State Farm wrote in its post-hearing brief that approval of its rate request was vital for its financial strength. The insurer said its financial position has led to a couple of credit downgrades and it was trying to avoid any additional downgrades, which could endanger the insurance policies of more than 1 million California homeowners.

Granting State Farm the rate increases was in the best interest of the state’s consumers because it helps keep insurance available, the Insurance Department’s post-hearing brief read.

Consumer Watchdog, the advocacy group that had objected to the interim rate hikes, wrote in its post-hearing brief that State Farm failed to prove that the increases were actuarially justified.