Zurich, Farmers Agree to $455 Million Settlement in Suit Involving Management Fees
Posted on: Thu, 07 Oct 2010 17:11:00 EDT ZURICH, Oct 07, 2010 (A. M. Best via COMTEX)
(By Diana Rosenberg, senior associate editor, BestWeek)
Zurich Financial Services Group and its subsidiary Farmers Group Inc. reached a tentative $455 million settlement in a suit seeking class-action status alleging Farmers charged policyholders excessive fees related to reciprocal insurance exchanges.
The case was first brought in August 2003 by Benjamin J. Fogel, who bought automobile, homeowners and umbrella insurance policies through three exchanges -- Farmers Insurance Exchange, Fire Insurance Exchange, and Truck Insurance Exchange. The exchanges are owned by their policyholders and pay management-services fees
to Farmers Insurance. The suit alleged Farmers earned billions in dollars in management fees in 2000, 2001 and 2002, resulting in profit margins between 44.3% and 53.5%.
"We categorically reject the plaintiffs' claims that the management-services fees are unreasonable," Zurich Financial Service Chief Executive Officer Martin Senn said during a conference call.
Zurich and Farmers agreed to the settlement to avoid the risks and expenses of continued litigation, to provide certainty to shareholders and clarity to customers, he added.
"The heightened media attention in the context of a class-action lawsuit in an environment which is not necessarily very, say, friendly to the financial-market sector altogether -- this could have some adverse impact on our reputation," said Senn.
The proposed settlement would cover some 13 million policyholders and claims dating back to 1999. While the payments to policyholders will vary, Zurich estimates individuals should receive an average of $35. Any remaining funds will go to the exchanges. In addition, Zurich will pay attorneys' fees of $90 million. The
settlement, if approved, will result in a third-quarter pretax charge of $295 million, Zurich said.
As part of the settlement, Fogel will drop all claims against Zurich and Farmers.
The trial judge who first heard arguments in the case issued a summary judgment in favor of Farmers, but that decision was reversed on appeal. Lawyers for Fogel were prepared to request that the case be certified as a class action, and a hearing on the matter had been scheduled for Oct. 12, said Walter Lack, of the law
firm Engstrom, Lipscomb & Lack, which, along with several other law firm, represented Fogel.
Attorney Philip K. Maxwell, who argued the case before the appellate division, said, "We believe the settlement is a good one for the class and hope it's approved."
A Los Angeles County judge must schedule a hearing on the proposed settlement. Typically, such hearings occur within 60 days, said Lack. Normally, a judge reviews a proposed settlement and has to decide if it is fair. If so, the judge grants preliminary approval of the settlement, and then notice must go out to all
class members and they are given a right to be in a class, Maxwell said.
"This case will be certified as settlement class on a nationwide basis," said Lack.
Farmers Insurance Group currently has a Best's Financial Strength Rating of A (Excellent).
