First Enron, Now State Farm
Branson West, MO. Oct 25,2002 - Wendy L. Gramm is the wife of Texas Senator Phil Gramm, (R-Tex). Sen. Gramm fathered the Gramm, Leach, Bliley Financial Modernization Act of 1999 that allowed banks to go into the insurance business and insurance companies to go into the banking business.
Mrs. Gramm was given a position on the Board of Directors of State Farm Mutual Auto Insurance Company where she served from 1994 until March, 2002. During approximately the same period of time Mrs. Gramm was also on the Board of Directors of Enron.
While on the State Farm board, Mrs. Gramm was charged with the responsibility of overseeing State Farm's internal audit activities. While on the Enron Board, Mrs. Gramm was charged with the same responsibility.
State Farm is a mutual insurance company. This means that each policyholder is a part owner of the company. When the premiums State Farm collects is greater than what is necessary to cover policyholder claims, operating expenses and appropriate reserves to cover foreseeable and unforeseeable catastrophic losses, the excess funds (premium overcharges) are to be returned to State Farm policyholders.
State Farm's internal audit department, by and through Mrs. Gramm, is charged, among other things, with seeing to it that the rights of State Farm policyholders are protected and that appropriate premium overcharges are refunded. These duties are just like those of the Enron internal audit department. Simply replace the word "Policyholder" with the word "Stockholder", and the words "Premium Refunds" with the word "Dividends" and you have a parallel correlation.
It now appears that Enron's "creative accounting" motives have been embraced by State Farm.
State Farm had been withholding approximately $12.6 Billion of premium overcharge refunds from its policyholders; this figure was projected in a story addressing property and casualty insurance issues, released in November, 1999 by the Insurance Consumer Advocate Network (iCan), a web-based consumer advocacy effort. At that time, iCan calculated State Farm owed each of its 50 million policyholders a premium refund of $252.00.
On September 11, 2002, Los Angeles Superior Court Judge Charles W. McCoy, Jr certified as class action a lawsuit brought against State Farm alleging the insurer had withheld as much as a $50 billion premium overcharge refund from its policyholders. If accurate, that would mean State Farm could be required to refund $1,000 to each of its 50 million policyholders.
The case is entitled (short version) Hill, et al. vs State Farm, et al. and bears case number BC-194-491.
This suit's 2nd amended complaint lays an extensive foundation for identifying four separate causes of action: breach of contract, breach of good faith, unlawful and deceptive business practices, and accounting fraud. This suit doesn't currently allege any violations of RICO statutes. If the jury makes a finding of bad faith, the potential exists for punitive damages. If that were to happen, State Farm could well be ordered to refund more than the projected $50 billion to its policyholders.
This complaint references financial statements, sworn to by State Farm and filed with the department of insurance, wherein State Farm defines the need for a 2:1 ratio of premium to surplus in order to maintain financial stability. The complaint goes on to clearly demonstrate State Farm has maintained a 2:3 ratio of premium to surplus. In short, State Farm appears to have withheld $3 in surplus for every $1 it swore was necessary.
The conduct that lead to the growing surplus happened in preparation for (and through) the point at which it became legal for insurance companies to venture into the banking business. If the allegations in this suit are found to be factual, it would appear that State Farm, by and through their wholly owned for-profit subsidiary State Farm Bank, is charging interest for loaning State Farm policyholders their own money.
These revelations come to light at a time when State Farm, with the occasional assistance of Texas Department of Insurance regulators, is involved in a public relations campaign trying to convince the general public that unprecedented premium rate increases are necessary. When a State Department of Insurance denies State Farm the rate increases they desire (New Jersey, Florida), State Farm simply wields its political power to get what it wants.