A 2022 class-action lawsuit filed against Allstate has led to a study by California’s insurance commissioner for which expert testimony claims the insurer overcharged a number of its policyholders with a total of nearly $1 billion.
The suit, filed within the U.S. District Court for the Northern District of California with Andrea Stevenson because the class representative, alleges Allstate engaged in unfair business acts and practices in violation of California’s Unfair Competition Law by failing to calculate car insurance premiums based on risk or loss costs and instead, using elasticity of demand like a rating factor to inflate premiums. Elasticity of demand describes individuals that are responsive to price changes, meaning the most loyal customers pay more than they'd pay based on the risk they present, according to the lawsuit.
“By using elasticity of demand as a rating factor, Defendants charge customers whose demand is inelastic-who are unlikely to find insurance elsewhere in reaction to a price increase-more than customers who are likely to look around in response to a price increase, other things being equal,” the suit states.
The suit claims Allstate made material and misleading omissions about how they determine auto insurance premiums and “wrongfully and unjustly collected higher car insurance payments from thousands of insureds than they were eligible for by using elasticity of demand as a rating factor.”
Allstate is also charged with violating California’s false advertising law and Cal. Ins. Code § 1861.10, which allows any person to initiate or intervene in any proceeding permitted or established pursuant towards the chapter, challenge any pursuit of the commissioner under the article, and enforce any provision of this article.
The suit class is California Allstate customers who were susceptible to the company’s alleged practice of using elasticity of demand like a rating factor, and were charged or paid a higher premium compared to risk-based premium, based on the lawsuit.
Allstate filed a motion to dismiss the lawsuit with the argument the insurance commissioner had primary jurisdiction over the plaintiffs’ claims. A legal court only dismissed the claim that Allstate had violated Cal. Ins. Code § 1861.10. All of those other suit was stayed pending a decision through the CDI on whether Allstate violated California's insurance laws, specifically Proposition 103.
Insurance Commissioner Ricardo Lara decided to hold an investigatory hearing to find out “ whether Allstate has violated California insurance law by using illegal price optimization; how Allstate implemented any such illegal price optimization in its rate and/or class plans; and how any such illegal price optimization impacted Allstate’s policyholders,” according to an April 27, 2022 hearing notice.
Price optimization is determined by the CDI as “any approach to considering a person's or class's willingness to pay for a greater premium relative to other individuals or classes.”
Allstate Communications Manager Ben Corey told Repairer Driven News, “Allstate has never used price optimization in California. We provide affordable coverage to Californians and all sorts of our rating plans are stringently reviewed and authorized by the California Department of Insurance before they're going into effect.”
California Department of Insurance Deputy Commissioner of Communications & Media Relations Michael Soller told RDN an administrative hearing is scheduled for May 10.
“As of now, our Department has no additional comment,” he said. “We look forward to presenting our findings so as to.”
Proposition 103, passed by California voters in November 1988, requires the “prior approval” of California’s Department of Insurance before insurance companies can implement property and casualty insurance costs, according to the CDI. The proposition prohibits rates that are “excessive, inadequate, unfairly discriminatory” or that violate the rates chapter.
To set auto insurance rates in California, insurers calculate basics rate and submit a rate application towards the CDI for approval. Rating factors will be put on the base rate to produce the premium. State regulations requires a class plan to be submitted, which discloses the rating factors the insurer uses and explains how those rating factors are put on the base rate to produce individual premiums. Three mandatory rating factors are authorized by statute: mileage driven, driving record, and years of driving experience. Other rating factors are permitted by law. Any others are prohibited, including elasticity of demand.
Allstate never notified Stevenson that they were charging her a lot more than other policyholders who presented the same risk because of her willingness to tolerate a cost increase, based on the suit.
“Had Defendants' utilization of elasticity of demand as a rating factor been disclosed, Plaintiff would have paid less for car insurance,” the suit states.
The suit seeks a purchase for restitution and disgorgement of profits associated with the alleged unfair business acts or practices, equitable and/or injunctive relief, declaratory relief; coverage of Stevenson’s attorneys' fees, non-taxable expenses, and taxable costs as well as pre-and post-judgment interest at it's peek rate permitted by applicable law. It also seeks an award for Stevenson and the suit class for compensatory damages within an amount to be determined at trial.
Nonprofit and nonpartisan public interest corporation Consumer Watchdog petitioned the insurance commissioner in 2022 to intervene within the administrative proceedings relative to the Stevenson v. Allstate case to “make sure that Allstate's insurance costs and premiums comply with California law generally and Proposition 103's requirements in particular,” based on the petition. Consumer Watchdogs states within the petition that the outcomes of the lawsuit “may have important repercussions for that California insurance marketplace in general.”
“As well as the need for protecting Allstate's current and potential policyholders from violations of Proposition 103, Consumer Watchdog seeks to intervene within this proceeding in order to defend and protect the right of all California consumers to avoid unjust premiums and unfair discrimination through the utilization of Price Optimization,” the petition states.
Attorney and Consumer Watchdog founder Harvey Rosenfield wrote Proposition 103 and led efforts to get it passed.
Leading up to a hearing before a CDI administrative law judge, written expert testimonies happen to be filed. Allan I. Schwartz, president of actuarial consulting firm AIS Risk Consultants, testified that Allstate engaged in price optimization “by taking into account an individual's or class's willingness to pay a greater premium in accordance with others or classes, as well as by not trying to get to an actuarially sound estimate from the risk of loss along with other future costs of a risk transfer.”
He also concluded that excessive premiums were charged to certain policyholders in excess of nine years totaling about $1 billion by October 22, 2022
Edward D. Cimini, Jr., CDI senior casualty actuary, said in his testimony he believes Allstate engaged in price optimization regarding the category plans at trouble in the lawsuit. His causes of why he believes that are redacted to the public.
“A billion dollars is a huge amount of overcharges,” Rosenfield said. “The insurance coverage commissioner comes with an independent obligation to monitor industry and punish wrongdoers and punish insurance companies that violate what the law states because the bottom line for that insurance providers – they’re financial creatures. They simply do whatever they can to maximize their profit at the cost of everyone else.”
The insurance commissioner can implement civil penalties, which may be separate from exactly what the district court decides, Rosenfield added.
Consumer Watchdog attorney Danny Sternberg said Allstate’s violations are “no minor violation from the law.”
“They figured out an innovative, sneaky way to overcharge their safest drivers, their most profitable customers … their most loyal customers,” he said. “They cheated not just their policyholders using this method, but the marketplace here in California.”
