Comments of the Centter for Econ

nomic Justicce to the

Texas
T
Deparrtment of In
nsurance
Regard
ding Mandattory Arbitration Provi sions in Inssurance Poliicies
Ju
uly 6, 2016
Commissione
C
er Mattax, th
hank you for the opportuunity to speakk on the propposal to stripp a
consumers civil righ
hts via an end
dorsement reequiring manndatory arbiitration. Texxas statutes ddirect
you to diisapprove a policy
p
form if it containss a provisionn that:

violates any
a law;
is unjust;
is deceptive;
encouragees misrepressentation; or
violates public
p
policy
y.

Any
A one of th
hese results would
w
requirre disapprovval. The propposed Texass Farm Bureau
endorsem
ment managees to meet all five of the triggers for disapproval. But the moost revealingg
aspect off the proposaal is the blataant discrimin
nation againsst Hispanic ppolicyholderrs. Farm Buureau
proposes to introducee the endorseement in Sou
uth Texas coounties with the highest Hispanic
populatio
on in the statte. For somee reason, Farrm Bureau ddoesnt wantt counties wiith
predomin
nantly Whitee policyholders to get thee benefit oof this endorrsement. Thhe fact that thhe
mandatorry arbitration
n is imposed
d on predomiinantly Hisppanic commuunities and nnot imposed on
predomin
nantly Whitee communitiies demonstrrates that maandatory arbiitration is a bbad deal for
insurancee consumerss.
CEJ
C supports the commen
nts of Texas Watch, whiich thoroughhly explain aand justify yoour
disapprov
val of the Faarm Bureau or
o any other policy form
m or endorsem
ment requiring mandatorry
arbitratio
on to settle a personal lin
nes or small business
b
insuurance policcy claim.
My
M name is Birny
B
Birnbaaum. I speak
k today on behalf the Ceenter for Ecoonomic Justicce
for which
h I serve as Director.
D
CE
EJ is a Texass-based non--profit organnization that, since 1996, has
advocated on behalf of consumerrs primarilly low-incom
me and minoority consum
mers for fairr
access an
nd fair treatm
ment to basicc services, in
ncluding creddit, insurancce and utilityy products annd
services in
i Texas and
d across the country. CE
EJ receives nno support frrom the insuurance industtry or
from trial lawyers.

CEJ Comments to TDI on Mandatory Arbitration Provisions in Insurance Policies

July 6, 2016
Page 2

My testimony today is based on 25 years of experience as an insurance regulator, expert

witness and consumer advocate on insurance issues. I formerly served as Chief Economist of
OPIC and as Chief Economist and Associate Commissioner for Policy and Research at the TDI.
In those roles, I performed numerous analyses of insurance markets and insurance rates,
including the impact of major changes to the civil justice system passed by the Legislature in the
mid-1990s. Since leaving the TDI, I have consulted with state insurance departments, state and
federal enforcement agencies and have served as an expert witness in a variety of insurance
matters, including review of insurance rates. On behalf CEJ, I have testified in numerous
proceedings in Texas and other states as well as before the NAIC and NCOIL and Congress. I
have served for many years as a designated consumer representative at the NAIC and also serve
as a member of the Federal Advisory Committee on Insurance, chairing the subcommittee on
Affordability and Availability issues.
CEJs testimony today will demonstrate why the proposed mandatory arbitration
endorsement or any similar policy provision must not be permitted.
I.

It is clear that the purpose of the endorsement is to reduce claim payments, not
to settle claims more efficiently.

The stated purpose of arbitration is to provide a dispute resolution alternative to the

courts as a means for more quickly and efficiently resolving disputes. Putting aside for a
moment the unjust nature of the proposed endorsement, the promise of arbitration is lower claim
settlement costs through allegedly more efficient dispute resolution than the courts. But, we can
see from the Farm Bureaus filings with the Department that the intent of the endorsement is to
dramatically reduce claim payments to predominantly Hispanic policyholders.
Insurance companies report the amount of claim settlement costs by line of insurance in
statutory annual statements and in rate filings. Reviewing the Insurance Expense Exhibits of
Texas Farm Bureau Mutual and Texas Farm Bureau Underwriters, we see that from 2012
through 2015, the total claim settlement expense comprised of two categories Defense and
Cost Containment Expense and Adjusting and Other Expense was 5.9% of premium. In their
most recent rate filing, the claim settlement expense is even less just 5% of premium.1
These expense categories cover all claim settlement expenses, from routine adjusting and
overhead to litigation expenses. So, even if we assume a massive reduction in litigation costs
which would be offset to some degree by the addition of the arbitration costs and say that total
adjusting costs decline by 20%, the overall rate impact is just 1%.2

See attached 2012 to 2015 data compiled from the Texas Farm Bureau Mutual and Texas Farm Bureau
Underwriters Insurance Expense Exhibit. In the 2016 Farm Bureau rate filing (SERFF Tracking TEXS-130452704),
Farm Bureau selects a combined DCCE and AOE provision of 8.2%. Utilizing the permissible loss ratio of 66.2%
used by Farm Bureau in the filing, the total claim settlement expense as a percentage of premium is .662 x .082 or
about 5%.

Assuming total claim settlement expenses are 5% of premium, a reduction of 20% is 1% of total premium.

CEJ Comments to TDI on Mandatory Arbitration Provisions in Insurance Policies

July 6, 2016
Page 3

Yet, in response to a question by the Department, Farm Bureau states the endorsement
will be imposed in only a few of the 254 Texas counties and that the discount in those
predominantly Hispanic counties will be 10% to 25%. In a January 8, 2016 response to a
question by the Department, Farm Bureau wrote:
1. For all new business, and at the first renewal on existing business, the optional
arbitration endorsement will be offered in exchange for a premium discount in the
following counties: Brooks, Cameron, Duval, Hidalgo, Jim Hogg, Jim Wells,
Kenedy, Kleberg, Nueces, Starr, Webb, Willacy, Zavala, and Zapata. The discount
amount will vary by county from 10% to 25%.
2. For all new business, and at the first renewal on existing business, the optional
arbitration endorsement will also be offered in exchange for a premium discount in
the following counties: Aransas, Brazoria, Calhoun, Chambers, Galveston, Jefferson,
Matagorda, Refugio, and San Patricio. The discount will be 10 % in these counties.
3. As we discussed in our meeting, the arbitration endorsement will be filed for use
statewide. However, the discount rate for the remaining counties will be set at 1 or
2%. We will amend our Agent Manual and Underwriting Guidelines to state that the
endorsement may only be offered in the counties specifically listed in paragraphs 1
and 2 above. If future events give us cause to offer the endorsement in other counties,
we would file a new rate plan covering the discount amounts offered for the
endorsement in the new counties and amend and file our underwriting guidelines to
allow our agents to offer the endorsement in those counties.
A discount ranging from 10% to 25% is not supported by a 1% reduction in claim
settlement expenses Farm Bureau clearly anticipates reducing claim settlements in these
predominantly Hispanic counties.
A review of the Farm Bureau rate filings also reveals that there is no difference in the
claim settlement costs as a percentage of premium across counties. Stated differently, the same
percentages of premium for DCCE and AOE are used in each county. If litigation costs were
significantly greater in certain counties, we would expect that to show up in wide variation in
DCCE across counties. But the Farm Bureau rate filings do not show this.3
We find further confirmation of the intent to reduce claim payouts in a December 2013
rate filing by the Farm Bureau. In that filing, Farm Bureau revised its rates by county according
to an actuarial formula. Of the 254 counties in Texas, Farm Bureau deviated from that actuarial
formula in Hidalgo County, where it selected a rate 10% greater than the indicated rate, stating,
expected losses for Hidalgo County are increased due to a highly litigious environment.4

For example, the 2016 Farm Bureau rate filing (SERFF Tracking TEXS-130452704) shows no deviation for
DCCE or AOE by county in the territorial rate development. Nor did the December 2013 rate filing (TDI File
Numbers 9212562111 and 9212562112.
4

Ratefilingpageattached.

CEJ Comments to TDI on Mandatory Arbitration Provisions in Insurance Policies

July 6, 2016
Page 4

It is unclear why the Department did not disapprove this arbitrary and unfairly
discriminatory rate for Hidalgo County. But, the 2013 Farm Bureau filing confirms that Farm
Bureau views a policyholders right to enforce the terms of the insurance policy by going to
court as something that increases claim payments. For the Farm Bureau, litigation means higher
claim payments, not just higher claim settlement costs. So, by imposing a mandatory arbitration
endorsement that strips policyholders of their rights, Farm Bureau promises a discount that far
exceeds any expected dispute resolution efficiencies from arbitration. With the proposed
endorsement, the term discount will now mean reductions in claim settlement.
II.

The mandatory arbitration endorsement is more appropriately called the

Hispanic Policyholder Discrimination Endorsement.

The table below shows that counties in which Farm Bureau will impose the endorsement
and expects the largest reduction in claim payouts (reflected in discounts up to 25%) are
counties with predominantly Hispanic populations. Ten of the top eleven counties ranked by
share of Hispanic population are in this group of Farm Bureau counties with the Hispanic share
of the county population ranging from 87% to 96%.5
Starr
Webb
Zapata
Zavala
Jim Hogg
Hidalgo
Brooks
Cameron
Duval
Willacy
Jim Wells
Kennedy
Kleberg
Nueces

95.70%
95.30%
93.50%
92.90%
92.10%
91.00%
89.90%
88.50%
88.50%
87.40%
79.30%
75.20%
71.40%
62.00%

Hispanic share of county population reported at http://www.indexmundi.com/facts/united-states/quickfacts/texas/hispanic-or-latino-population-percentage#chart which cites U.S. Bureau of the Census, Population
Estimates Program (PEP)..http://www.census.gov/popest/estimates.html.

CEJ Comments to TDI on Mandatory Arbitration Provisions in Insurance Policies

July 6, 2016
Page 5

As noted above, Farm Bureau intends imposing the mandatory arbitration endorsement in
14 counties with predominantly Hispanic population and not imposing it in the vast majority of
Texas counties. Farm Bureau says it will not impose the mandatory arbitration endorsement in
other counties until future events give Farm Bureau cause to impose the mandatory
endorsement. It appears that the cause for imposing mandatory arbitration in place of access to
the courts is a high Hispanic share of the countys population or consumers with the temerity to
enforce their rights under an insurance contract.
The Farm Bureaus racially-targeted imposition of the mandatory arbitration endorsement
and the desired goal of reducing claim payments by cutting off access to the courts violate each
of the five triggers for disapproval of a policy form.
III.

The proposed mandatory arbitration endorsement violates the Fair Housing Act

Since 1968, Federal agencies have enforced the Fair Housing Acts (FHA) prohibition
against discrimination on the basis of race to stop racial discrimination in the sale and servicing
of homeowners insurance. The FHAs application to homeowners insurance is well settled. Last
year, the U.S. Supreme Court, in Texas Department of Housing and Community Affairs v. The
Inclusive Communities Project, Inc., decided that disparate impact claims are cognizable under
the Fair Housing Act.
Whether or not the Farm Bureaus proposed mandatory arbitration endorsement reflects
intentional discrimination on the basis of race, it will clearly have a disparate impact on Hispanic
communities in Texas. The endorsement violates a law the Fair Housing Act which triggers
disapproval of the endorsement. You could no more approve this endorsement than you could
approve a proposal for a 20% reduction in claim payments in predominantly Hispanic counties
compared to predominantly White counties, which is the very effect this endorsement would
achieve.
IV.

The proposed mandatory arbitration endorsement creates unfair discrimination

in violation of the law and contrary to public policy.

The proposed endorsement will create unfair discrimination in homeowners rates or

claim settlements or both. Assume that two homes in a development built at the same time and
nearly identical are insured by Farm Bureau with one having the mandatory arbitration
endorsement and the other not having the endorsement. Now assume there is a hail storm that
similarly damages the roofs of the two homes. Would the insurance company pay 25% less for
the claim to the one who had the mandatory arbitration endorsement even though the value of
both claims was the same? If yes, that would be unfair discrimination in claim settlement. If the
claims are ultimately settled for the same amounts despite one having mandatory arbitration
imposed, then there is no basis for a 25% or 10% difference in rates which is the definition of
unfairly discriminatory rates.

CEJ Comments to TDI on Mandatory Arbitration Provisions in Insurance Policies

July 6, 2016
Page 6

It is important to point out that the difference in two policies access to courts versus
mandatory arbitration is not a risk characteristic of the policyholder. Prior to an event leading
to a claim, there is no difference in expected risk of loss the expected claim payment between
our two policyholders. As discussed above, any alleged efficiencies in claim settlement costs
from mandatory arbitration could not remotely support the proposed differences in rates.
Consequently, the proposed mandatory arbitration policy provision triggers disapproval because
it violates the law as a result of unfair discrimination in claim settlements or rates or both.
V.

The proposed mandatory arbitration provision is unjust and misleading because

it gives the insurer the choice of dispute resolution venue and rules.

The proposed endorsement filed by the Farm Bureau provides for three processes an
appraisal process if there is a dispute about the value of the claim, mediation if a dispute still
exists after appraisal and mandatory arbitration if a dispute still exists after mediation.
Under both the appraisal process and the mandatory arbitration, Farm Bureau selects the
judge or ultimate arbiter of the dispute. Under the appraisal process, if the policyholder and the
Farm Bureau cannot agree on an umpire, then the umpire comes from one of two firms
selected by Farm Bureau. Under mandatory arbitration, the arbitrator comes from one of two
firms selected by Farm Bureau.
The ability of the Farm Bureau to select the firms supplying the umpire or the arbitrator
skews the procedures heavily in favor of the Farm Bureau and is unjust and unfair. The choice
of arbitration firms ensures the firms will be biased in the favor of the Farm Bureau if that
werent the case, then Farm Bureau would simply replace the firm providing the umpire or
arbitrator. The firms selected by the Farm Bureau will receive significant business and be aware
that if the umpires or arbitrators decide in favor of the consumer too often, Farm Bureau as
well as other insurers using these firms will drop the firm from the list in a future endorsement.
In addition, the endorsements requirements that "the arbitrator shall be experienced in
insurance claims" and work for a firm selected by the Farm Bureau mean the arbitrator will
almost always come from the insurance industry. They will not only be naturally biased for the
insurer, but they will want to maintain a reputation as pro-insurer for future job prospects.
To illustrate the biased and unjust nature of appraisal and arbitration provisions, we can
ask if Farm Bureau or any other insurer would still want to use these claim settlement processes
if other organizations, whose members or staff were experienced in insurance claims, were
required to be on the list of arbitration firms offered to policyholders. What if United
Policyholders, an organization deeply experienced in assisting consumers with insurance claims,
were an option for policyholder selection as an arbitrator? Or a member of the insurance section
of the Texas Trial Lawyers Association? No insurer would agree to add these organizations
because policyholder selection of these organizations as providers of the arbitrator or umpire
would not guaranty outcomes favorable to insurers.

CEJ Comments to TDI on Mandatory Arbitration Provisions in Insurance Policies

July 6, 2016
Page 7

VI.

The endorsement and disclosure are misleading and inadequate because they fail
to prevent unwanted imposition of the endorsement upon consumers. There is
no disclosure that can remedy this severe problem.

The proposed mandatory arbitration provision is presented as optional a choice by the

consumer to accept or reject the endorsement. Yet, there are no safeguards to prevent imposition
of the endorsement upon consumers. For example, there is no requirement that the Farm Bureau
or its agents quote the policy premium with and without the endorsement and no requirement to
document consumer understanding and affirmative acceptance of the relinquishment of his or her
civil rights. Acceptance of a change in policy provisions of this magnitude should require
signature of a separate document by the consumers similar to the procedure used for waiver of
uninsured motorist coverage.
Beyond the issue of inadequate and misleading disclosure, it is a misrepresentation to call
the endorsement optional when Farm Bureau can guaranty universal or near universal
inclusion of the endorsement by simply pricing the policy without the endorsement far higher
than with the endorsement. As documented above, Farm Bureau is willing to arbitrarily increase
rates if Farm Bureau determines the community to be highly litigious.
In summary, there are no substantive safeguards in place to prevent misrepresentation of
the endorsement or mandatory imposition of the endorsement. And, if the endorsement is
approved, there is no safeguard against insurers filing new policy forms with mandatory
arbitration as the default or only choice of dispute resolution. Moreover, there is no solution to
the problem of misrepresentation or lack of meaningful consumer choice.
VII.

The confidentiality provisions thwart competitive markets and, consequently are

contrary to public policy.

It is clear that approval of the Farm Bureau endorsement will result in widespread
adoption of mandatory arbitration provisions as other insurers file similar endorsements or new
policy forms. Such a result will dramatically reduce competition in the Texas homeowners
insurance market in several ways a result contrary to public policy.
Public policy in Texas as reflected in deregulation of rates and forms over the past 20
years is to rely on competition in insurance markets to protect consumers. Stated differently,
public policy seeks to empower consumers to create a meaningful countervailing market power
to that of insurers and thereby discipline insurer conduct and practice.

CEJ Comments to TDI on Mandatory Arbitration Provisions in Insurance Policies

July 6, 2016
Page 8

The proposed mandatory arbitration endorsements confidentiality provisions thwart

competitive markets in several ways. First, the confidentiality provision gives the insurer a huge
advantage and creates a bigger disparity in market power between policyholders and insurers.
Insurers will have access to all the arbitration decisions and documents since they are a party, but
the consumer entering arbitration will not. So, for instance, the insurer will know how the
specific arbitrator ruled in the past and what kinds of arguments he/she likes or dislikes and can
plan accordingly or can use an attorney who has a good relationship with that arbitrator, while
the consumer will be in the dark.
Second, the confidentiality provisions may stifle consumers ability to shop for insurance.
The only exceptions are if "required by law" or "by agreement." A consumer shopping for
insurance may well want or need to disclose results of the arbitration to apply to another
company, but since such disclosure is not required by law, disclosure would require permission
of the insurer with whom the consumer had the arbitration. Such a result would be
anticompetitive by allowing an insurer to thwart consumer's right to shop around.
Third, confidentiality precludes the development of information available to the public
about how insurers fulfill their promises under insurance contracts. Consumers are routinely
advised to make insurance purchase decision beyond price, but the ability of consumers to
evaluate the claims-paying practices of insurers will be lost if claim settlement outcomes decided
via arbitration are confidential.
Fourth, confidentiality of claim settlements through arbitration will diminish the
usefulness of all-industry claims and fraud databases. If the arbitration outcomes are
confidential, the claim outcomes cannot be reported to claims databases such as CLUE or A-Plus
further thwarting competition and putting small insurers at a competitive disadvantage.
Fifth, the confidentiality provisions thwart competition by limiting data available to
regulators, including reporting of claims data to the Departments statistical agent.
In summary, allowing insurers to utilize mandatory arbitration provisions with
confidentiality of outcomes will radically diminish the competitive structure of the homeowners
insurance market a result contrary to public policy.
VIII. The proposed mandatory arbitration endorsement is unjust and contrary to
public policy because the larger the claim, the less rights afford the policyholder.
The proposal includes an option for Justice Court for claims of $10,000 or less:
If any dispute still existing after appraisal and mediation is small enough to qualify
for resolution in a small claims court (Justice Court), either party may request to have
the dispute resolved there instead of by arbitration. If both parties agree to use small
claims court instead, then arbitration is not required.

CEJ Comments to TDI on Mandatory Arbitration Provisions in Insurance Policies

July 6, 2016
Page 9

Under Tex. Rules of Civil Procedure 506, either party may appeal the Justice Court
decision to County Court. The case must then be tried de novo in the County Court. A trial de
novo is a new trial in which the entire case is presented as if there had been no previous trial. So
this provision contradicts the alleged rationale for the endorsement for efficient dispute
resolution.
The provision is contrary to public policy because the larger the claim, the less the rights.
The US Supreme Court has repeatedly held that due process requires more rights when the claim
is larger, not less. Yet consumers with claims over $10,000 get less rights than those with
smaller claims because they are not given the option to go to court.
The Justice Court provision is misleading. The first sentence says either party may elect
justice court, but the second sentence appears to say both parties must agree. If the intent is that
just one party may go to Justice Court without agreement, the then endorsement is misleading
because of the second sentence of the paragraph. If the intent is that both parties must agree,
then both sentences are meaningless. Of course the parties can agree to waive arbitration at any
time; the parties can even agree to go to District Court instead of Justice Court.

Year
2012
2012
2013
2013
2014
2014
2015
2015

Total

CoCode
25380
25399
25380
25399
25380
25399
25380
25399

LineNo
4
4
4
4
4
4
4
4

DPW
106,928
73,882
133,594
71,105
158,503
71,827
171,481
68,154

DPE
95,858
74,454
119,564
72,562
145,031
71,316
163,817
69,519

Loss Inc
71339
46738
105598
58968
109607
55195
124617
50977

Pct

DCCE
205
193
672
137
554
2
423
23

Pct

AOE
5980
4365
7502
4407
8394
4256
7428
3113

Pct Total LAE Pct

2012

180,810

170,312

118077

69.3%

398

0.2%

10345

6.1%

6.3%

2013

204,699

192,126

164566

85.7%

809

0.4%

11909

6.2%

6.6%

2014

230,330

216,347

164802

76.2%

556

0.3%

12650

5.8%

6.1%

2015

239,635

233,336

175594

75.3%

446

0.2%

10541

4.5%

4.7%

855,474

812,121

623039

76.7%

2209

0.3%

45445

5.6%

5.9%