Closed doors shroud Farmers victory

Conferees got PAC funds after last-minute change

By CLAY ROBISON
Copyright 2003 Houston Chronicle Austin Bureau


AUSTIN -- An effort to impose new state oversight over a major source of homeowners' revenue for Farmers Insurance Group was quietly derailed during the closing hours of last spring's legislative session.

Fingerprints are hard to find, since the ultimate decision to side with Farmers was made behind closed doors. But several members of a House-Senate conference committee that stripped a key provision from an insurance regulatory bill -- over the objections of the bill's sponsor -- soon collected at least $10,000 from Farmers' political action committee.

On May 30, three days before the regular legislative session adjourned, four House conferees signed off on Senate Bill 14, which omitted language sought by their chairman and the bill's House sponsor, Rep. John Smithee, R-Amarillo.

At Smithee's insistence, the version of the bill previously approved by the full House had included a provision that would have given the state insurance commissioner some oversight of profitable management fees charged by insurers, primarily Farmers, operating in Texas.

Although the Senate didn't approve similar language, Smithee said he thought he had an agreement, in negotiations with senators, to keep the language in the final version of the bill. But after he left Austin for several hours to attend his daughter's graduation ceremony in Amarillo, other House conferees succeeded in killing the provision, which Farmers opposed.

Rep. Gene Seaman, R-Corpus Christi, said most of the House conferees wanted to remove the language.

Smithee was so angry that he refused to sign the conference committee report on his own bill and delivered a speech on the House floor, accusing Farmers of treating the Legislature and "everyone else in Texas" with "utter contempt."

One of the House conferees signing the bill was state Rep. Joe Nixon, R-Houston, who is now embroiled in a controversy over more than $300,000 in payments he has received from Farmers for mold-related claims on his west Houston home.

An allegation from a fired Farmers' executive that Nixon received preferential treatment on at least part of his claim because he is a legislator is being investigated by Travis County prosecutors. Nixon denies the complaint.

Nixon said he wasn't involved in final negotiations on the insurance bill because he was tied up for hours that same day on the final drafting of House Bill 4, a bill making major changes in civil justice laws.

"I don't know what a management fee is," Nixon said Tuesday.

Seaman and Rep. Larry Taylor, R-Friendswood, two other House conferees, agreed that Nixon was mostly a nonplayer on insurance regulation. Taylor said the management fees were an "insignificant part" of the bill, which made other major changes in how homeowners and auto insurance are regulated in Texas.

"No one else had heartburn on the management issue, except Smithee," Taylor said.

Management fees are what some insurance companies charge their affiliates for centralized accounting and other administrative functions, and they can affect policyholders' rates. Farmers Insurance Group is the biggest beneficiary of such fees in Texas, Smithee said, and he believes the fees have been "abused."

In a lawsuit filed against Farmers by the state during last year's homeowners' insurance crisis, then-Texas Attorney General John Cornyn said Farmers' parent company, headquartered in Los Angeles, charged its affiliated exchanges in Texas a management fee of between 12 percent and 13 percent of collected premiums.

Cornyn said Farmers, in filings with the Securities and Exchange Commission, also reported an after-tax profit for fiscal 2001 of $438 million nationally from its management services alone. His suit alleged that Farmers, through the management fees, made more money -- to the detriment of policyholders -- as premiums increased.

Farmers' spokeswoman Michelle Levy defended the fees, saying the "language should have been stripped out of that bill."

"Farmers is one of the most cost-effective companies from an expense perspective in our industry," she said.

The 10-member conference committee on SB14 avoided holding public meetings by making sure there never was a majority of three senators or three House members present at the same time, according to several members and staffers. Members came and went during the negotiations.

But conferees interviewed by the Houston Chronicle agreed that at some point on May 30, the fee issue came up while Smithee was present with some of the senators.

Sen. Leticia Van de Putte, D-San Antonio, said Smithee told Senate conferees he wanted the provision in the bill, and the senators agreed to include it.

Later that day, after Smithee had left Austin for Amarillo, other House members returned to the negotiations and said they wanted the language removed, Van de Putte said. She said she thought Nixon was in the room part of the time, but Nixon denied it.

Another Senate conferee, Sen. Troy Fraser, R-Horseshoe Bay, recalled Taylor speaking out against the management fee provision.

In a recent interview, Taylor said he feared putting management-fee oversight into the new law would "pre-empt" a settlement the state already has made with Farmers and encourage new class-action lawsuits.

Rep. Steve Wolens, D-Dallas, who unsuccessfully tried to outlaw the management fees during House debate on the insurance bill, said the language sought by Smithee was "better than the namby-pamby agreement" that the state made with Farmers.

The language was deleted just in time for the final version of the bill to be printed before the end-of-session deadline for final action on legislation.

"I know when I got back I was upset, but no one took responsibility for it (the omission)," Smithee said in a recent interview, declining to point a finger at any of the conferees.

It was illegal for legislators to accept political donations during the regular session. But soon after the June 2 adjournment, political giving resumed, and the Farmers PAC made contributions to several legislators by June 30.

They included $3,000 to Taylor, $3,000 to Seaman, $2,000 to Nixon, and $2,000 to Sen. Kip Averitt, R-Waco, one of the five Senate conferees.

The recipients insisted the donations had nothing to do with their decisions as insurance conferees.

"I got a contribution from a PAC that has supported me in the past," Nixon said.

"There was no quid pro quo," Taylor added. "There's no question they (Farmers) appreciated my work all session on the insurance bill. (But) you tend to support people who have similar viewpoints as you."