Last Friday, a Texas state appeals court ruled that the Texas Department of Insurance ("TDI") was not empowered to issue a disciplinary order against State Farm Lloyds in connection with a dispute between the parties relating to the insurer’s rates. The appellate decision is the latest development in a clash between the parties that began in 2003 with the passage of a law requiring insurance companies in Texas to file their rates with the TDI for review.

After reviewing State Farm’s filing, the TDI ordered the insurer to reduce its rates by 12 percent. State Farm, citing a provision of the rate filing law that permits insurers to continue charging their initially filed rates while appealing rate rulings, refused to lower its rate and appealed the order in district court, which ruled in favor of the insurer. The TDI appealed the rate ruling (the appeal is still pending) and simultaneously sought to impose sanctions against State Farm for its “excessive rates.” State Farm appealed the sanctions order, and a state trial court ruled in the TDI's favor.

Last Friday, a state appeals court overturned the trial court's decision regarding the sanctions order, citing the fact that the rate filing legislation permits insurers to charge their initially filed rates during the pendency of any appeal to a rate ruling. If the insurer's appeal is denied, it must reduce its rates to the level requested by the TDI, and refund the "overcharged premium" plus interest to each policyholder. Given that State Farm's conduct was protected within the provisions of those rules, the appeals court held that the TDI did not have the authority to penalize State Farm for actions permitted under the insurance law. Accordingly, the appeals court reversed the trial court’s decision and granted State Farm declaratory relief.

The TDI has not issued any statements in connection with the decision, and it is unclear what steps Texas regulators will take next. Unless a settlement is reached between State Farm and the TDI with regard to rates, it appears this dispute will continue until the district court appeal is decided. State Farm is the largest home insurer in Texas.

For a copy of the decision, click here.