Alameda County DA sues Farmers Insurance over ‘widespread scheme’ to underinsure homes

The lawsuit alleges Farmers is keeping policyholders in the dark about the costs to rebuild homes destroyed in a disaster.

Alameda County District Attorney Pamela Price is suing Farmers Insurance over an alleged “widespread scheme” to underinsure homes across California.

Price has accused Farmers and multiple affiliated companies of lowballing homeowners on the cost estimates to rebuild their properties — meaning policyholders lack enough coverage to replace their homes in the event of a wildfire or other disaster.

The carriers make up 15% of the state home insurance market, according to the DA’s office. It was unclear how many Bay Area homeowners have Farmers policies.

Price, who’s facing a recall campaign in response to growing crime concerns, said the lawsuit aims to ensure the companies offer fair and accurate replacement cost estimates so homeowners can make informed decisions when buying a policy. The complaint also seeks civil penalties of up to $2,500 for each violation of state regulations and other consumer protection laws.

“The relationship between an insurer and the homeowner is necessarily one of unequal knowledge, expertise, information, and bargaining power, with homeowners depending on the insurance company to act in good faith,” Price said in a statement this week.

Farmers called the allegations “simply incorrect” and maintained it does not seek to provide low replacement cost estimates.

“We intend to discuss this with the DA’s office,” the company said in a statement. “We look forward to addressing these concerns and defending our position.”

The complaint against Farmers, filed last month in Alameda County Superior Court, did not name any victims of the alleged scheme. A spokesperson for Price declined to answer questions about the suit. It was unclear why the district attorney’s Consumer Justice Bureau singled out Farmers in the complaint.

In addition to Farmers, the complaint names the Fire Underwriters Association, Fire Insurance Exchange and Mid-Century Insurance as defendants.

The lawsuit comes amid increasing turmoil in California’s insurance market as insurance providers, citing more frequent catastrophic wildfires, have ended coverage for tens of thousands of homeowners in fire-risk areas, including the East Bay Hills, Santa Cruz Mountains and Wine Country. Last year, State Farm and Allstate paused writing new policies anywhere in the state, where strict regulations keep premiums low compared to other parts of the country.

To quell the unrest, state regulators have embarked on a yearlong overhaul of home insurance rules and pricing. The goal is to allow providers more latitude to raise premiums to account for the threat of climate change while extracting commitments to extend coverage in fire-risk areas.

The California Department of Insurance said it’s not involved in Price’s lawsuit but has received the complaint and is reviewing the allegations.

Price said she hopes to help level the playing for homebuyers by forcing Farmers to consider more factors about a “home’s actual features and characteristics” when determining replacement estimates instead of “some hypothetical home that suits the insurance company’s bottom line.”

Price took aim at the software that companies use to calculate the estimates, alleging it relies mainly on general information like a property’s zip code. Her office alleged using the software to generate lower cost estimates saved the companies $44 million over a year.

The consumer advocacy group Consumer Watchdog, a frequent critic of the insurance industry’s use of algorithms to set premiums and policies, said it was “glad to see insurance companies’ unchecked use of big data and claims technology get a closer look.”

But Emmi Ensign, president of Golden Benchmark, an insurance brokerage in Fremont, questioned whether Price has a clear understanding of how the insurance industry operates. She said the estimates generally already take into account various factors such as square footage, the number of stories a home has and the cost of new construction. Homeowners can also ask to pay for additional coverage to mitigate the risk.

“It’s not like we’re flying by the seat of our pants with what the replacement costs are,” Ensign said.

She added, however, that when homeowners renew their policies, the plans don’t always fully account for increases in construction costs. She said insurance companies, agents and homeowners all bear some responsibility for knowing the risk and updating coverage if needed. Construction costs have soared in recent years amid inflation, material and labor shortages and supply chain issues.

This is the second time Price has sued a major insurance company. Last month, she filed suits making similar claims against auto insurers, including Progressive and the United Services Automobile Association.