Previously, we began looking at a dispute between Farmers Insurance and the California Department of Insurance over whether the agency is allowed, under Proposition 103, to retroactively review previously approved insurance rates.

At issue in the Farmers case is whether the insurance company was charging illegal rates as part of an alleged practice of “price optimization.” This is a practice whereby companies charge less for customers who are more likely to shop around. It is illegal in California. Farmers denies that it engages in the practice, but the Department of Insurance is looking to investigate the matter. 

On its face, the idea of the agency changing its mind about previously approved rates doesn’t make a lot of sense. Businesses rely on regulators to be consistent in their application of the law, and base their compliance efforts on agency decisions. For an agency to change its mind seems unfair to businesses. It wouldn’t be the first time, however, the agency has ordered retroactive rate cuts and refunds.

The first instance of retroactive rate review since the passage of Proposition 103 occurred last year, when the Department of Insurance ordered State Farm to lower insurance rates retroactively to July 2015. The decision forced State Farm to refund consumers about $100 million. That decision is still being challenged in court, and Farmers is challenging the Department of Insurance’s actions in its case in hopes that the State Farm litigation will be resolved in opposition to retroactive rate review.

Protecting an insurance company’s rights in legal challenges such as those involved in the State Farm and Farmers cases is important, but proactive compliance with state law is also critical for ensuring the success of the business. Failure to comply with the laws governing the industry puts companies at significant financial risk. Working with experienced legal counsel can help ensure insurance companies optimize company policies so their legal liabilities are minimized.