OAKLAND, Calif. — On the second day of a landmark hearing in Oakland, State Farm’s proposal to increase home insurance premiums by 22% in the wake of the Los Angeles wildfires came under significant scrutiny, with questions raised about potential conflicts of interest and the accuracy of the financial analysis behind the hike.
Administrative Law Judge Karl-Fredric Seligman opened the day’s proceedings by addressing a potential conflict of interest involving State Farm’s expert witness, Nancy Watkins. Watkins, a prominent insurance consultant, had been involved in advising both State Farm and the California Department of Insurance, a dual role that some argue could undermine the integrity of the proceedings.
Michael Madigan, representing State Farm, sought to clarify the situation, noting that the offer of proof concerning Watkins’ testimony had not been found problematic in terms of scope during prior discussions. However, the California Department of Insurance disagreed.
“The department believes that the court was correct in excluding the testimony of Ms. Watkins based on yesterday’s rulings,” said Nikki McKennedy, senior staff attorney for the Department of Insurance. “Nancy Watkins has received confidential information from the department, and her involvement in representing both parties presents an undeniable conflict of interest. We cannot waive this issue.”
Judge Seligman agreed, stating, “This is not a conclusion of malfeasance, but rather an application of the law. The witness is disqualified, and the declarations will be struck, though they will serve as offers of proof.”
Following this ruling, the hearing continued with the cross-examination of Dr. Appel, an economist tasked with analyzing State Farm’s financial condition to determine whether Insurance Commissioner Ricardo Lara should approve the proposed rate increase.
Dr. Appel, when questioned by Consumer Watchdog’s lead attorney, William Pletcher, confirmed his support for the rate hike. “You wrote that the interim rate increase is not only reasonable and justified but critical?” Pletcher asked. “Yes,” Dr. Appel responded.
However, when pressed on whether the current rate was invalid, Dr. Appel maintained that his conclusions were based solely on State Farm General’s financial health. “My conclusions are based on my analysis of State Farm General’s financial condition and its implications for the California homeowners insurance market,” he explained. “That is the basis for my conclusion that the interim rate increase is fair and reasonable.”
McKennedy also questioned Dr. Appel about the potential consequences of denying the rate increase. “If the increase is not approved, there’s certainly a risk that in the event of another large catastrophic event, the company could become insolvent,” Dr. Appel warned.
Addressing broader concerns, Dr. Appel noted the possible ramifications of a decline in State Farm’s credit rating or financial strength. “A reduction in State Farm General’s credit rating could have severe consequences for the broader market,” he added.
The hearing is scheduled to conclude tomorrow, with several other witnesses set to testify. As the case continues to unfold, stakeholders, including policymakers and consumer advocates, will closely monitor the outcome of this highly anticipated proceeding.
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