State Farm faces questions about accuracy of rate hike amid conflict with expert witness

OAKLAND, Calif. -- State Farm is one step closer to making their case to raise property insurance rates for millions of California policyholders. But Consumer Watchdog, the only group fighting the hike, still says the numbers don't add up.

7 On Your Side's Stephanie Sierra is following the latest from the hearing at the California Department of Insurance headquarters in Oakland.

The objective of this hearing is for State Farm to prove these rate hikes are justified. The commissioner has specifically asked for the supporting data.

As of right now, State Farm has slightly lowered their rate hike request for homeowners from 22% down to 17%. They are still asking for a 15% increase for renters, and up to a 38% increase for rental dwellings.

But the insurance company's first rate hike hearing in a decade has been met with controversy over a potential conflict of interest for State Farm's expert witness, Nancy Watkins.

RELATED: Department of Insurance to hear State Farm's justifications for rate hike as high as 38%

"We found out that she was basically hired by the Department on formulating regulations that are favorable to the industry. That would include the cost of reinsurance that companies have to buy," said Pamela Pressley, the senior staff attorney for Consumer Watchdog.

Watkins currently has a consulting contract with the Department of Insurance where she not only has access to confidential information, but is specifically assessing rates for State Farm.

"The department is trying very hard not to take sides," said Nikki McKennedy, the senior staff attorney for the California Department of Insurance.

CDI says State Farm asked last year if the Department would waive Watkins' conflict of interest. After the department said no, State Farm hired her anyway.

The judge sided with the Department of Insurance and denied State Farm's appeal to keep Watkins as a witness.

Members of the public were present as well to observe the hearing.

RELATED: CA insurance boss not present at hearing as State Farm makes case to raise insurance rates up to 38%

Richard McLaughlin is a California native who recently moved back to Burlingame after living on the East Coast. McLaughlin lost his childhood home in the Palisades Fire this January.

"We're really worried about wildfire risk in general," said McLaughlin, citing his family's desire to settle in California.

"It seems like State Farm is presenting that they're in a dire financial situation. And they're trying to fix that by both injecting money from their parent org and also increasing rates. And they haven't really justified that mix," said McLaughlin.

Under state insurance law, a complex formula is required to determine whether rate increases are excessive or inadequate.

Initially State Farm asked for a roughly 22% rate hike for homeowners -- which dropped to 17% after negotiations with the Department of Insurance.

State Farm's hired expert witness, economist Dr. David Appel, claims the 17% figure is what State Farm needs for financial stability. Yet he also testified he didn't actually calculate those numbers.

MORE: State Farm asks for 'emergency' 22% homeowners' insurance rate hike in wake of LA wildfires

"There could be any number of calculations that are below 17% that would also be reasonable -- our actuary actually did those calculations and they range from a negative to very low. Maybe like 5% range," said Pressley of Consumer Watchdog.

In a statement, State Farm wrote: "We are looking forward to reinforcing the need for an emergency interim rate to help State Farm General Insurance Company continue to operate in California for the long-term."

Patrick Wolff has lived in San Francisco for twenty years. He's concerned about the impacts of rate hikes on consumers.

"It does seem that State Farm is in trouble and does need the rate increase. Or something like the rate increase. But my broader frustration is what I see (as) just such poor management by the California Department of Insurance," said Wolff.

The judge has ten days to issue a proposed order with his recommendation. Insurance Commissioner Ricardo Lara holds the power to make the final decision.

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