The Insurance Coverage Gap Worsens—Farmers Policy Changes Approved

Last week the Supreme Court of Texas weighed in on a longstanding dispute regarding the decision by Farmers Group Inc. (“Farmers”) to replace their HO-B homeowner policies with less comprehensive HO-A policies, back in 2001.¹ Following an influx of mold claims in Texas, Farmers and other insurers decided to replace their HO-B policies, a broad “all-risk” policy, with narrower HO-A policies, or “named peril” policies.

The Texas Department of Insurance (“TDI”) approved Farmers’ decision, mandating all insurers remove HO-B policies from the marketplace. As a substitute, TDI approved an enhanced HO-A policy providing coverage for some water claims. The Texas Insurance Code permits insurers to discontinue a policy so long as it provides a 30-day notice to the insured prior to its expiration.² To this end, Farmers notified policyholders in 2002 of the nonrenewal of their HO-B policies and their continuation to offer coverage under its HO-A policies.

Following receipt of the non-renewal notice, Plaintiff Geter filed suit against Farmers in August 2002 claiming Farmers did not have the right to refuse to renew the HO-B policies. Farmers, relying on their statutory right of nonrenewal of policies following a 30-day notice filed for summary judgment. Geter pointed to paragraph 6 of the “Conditions” section of the Farmers’ policy providing: “We may not refuse to renew this policy because of claims for losses resulting from natural causes.” Geter postured the increased mold claims prompting the discontinuation of the HO-B policies were “claims for losses resulting from natural causes.” If correct, this prohibited Farmers from refusing to renew its HO-B policies.

In addition, Geter argued Farmers breached its policy language with its decision not to renew as it did not qualify as proper notice (based on a prohibited reason for nonrenewal). The trial court granted Geter’s declaratory judgment claim and class certification, finding Farmers breached the insurance contract in not renewing its HO- B policies. In 2019, the appellate court affirmed the trial court’s decision, concluding the notice of nonrenewal was based on claims and those claims were for losses resulting from natural causes, such as water, mold, and foundation claims.

Consequently, the Supreme Court of Texas disagreed. Citing § 551.105 of the Texas Insurance Code, Justice Backlock concluded:

By statute, Farmers was permitted to discontinue its HO-B policy so long as it provided 30-days’ notice that the policy would not be renewed.

The supreme court found Farmers and other insurers, (upon approval from TDI), chose not to renew the HO-B policy because of statewide losses — not because of losses claimed by Plaintiffs or any particular policyholder. Justice Backlock reasoned:

Such a reading of the policy would undermine TDI’s regulatory authority to react to changing circumstances in the insurance industry and would bind Farmers to suffer statewide underwriting losses in perpetuity.

As such, the court concluded there was “nothing improper about the 30-day notice Farmers provided,” granting summary judgment in favor of Farmers. The case was remanded back to the trial court for further proceedings. For additional information and progress updates, check out Farmers Grp., Inc. v. Geter.
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¹ Farmers Grp., Inc. v. Geter, No. 19-0996, 2021 WL 1323407 (Tex. Apr. 9, 2021).
² Tex. Ins. Code § 551.105.