Florida Insurance Commissioner Kevin McCarty, in a harshly worded order, has told State Farm it can go forward with its plan to exit the state’s homeowners insurance market, but only under stringent conditions he has set to protect policyholders.

The company–which has 1.2 million home and condominium policyholders in the state–will not be allowed to dump its customers on Citizens Property Insurance Corp., the state-run insurer of last resort, under the order, which also said that State Farm should allow its agents to place policies with other private insurers.

The order called the State Farm argument that it needs to withdraw because it faces the danger of insolvency and inability to play claims “both disingenuous and misleading.” State Farm, the order said, “created its current ‘crisis’ by failing to pursue the opportunities that were available to reduce its expenses and mitigate its decrease in premium volume.”

The company said it saw surplus reduced by $201 million during the first three quarters of 2008. State Farm moved to withdraw after it was denied an average rate increase of 47.1 percent.

Mr. McCarty said at a press conference that his office would be working to ensure that State Farm policyholders obtain coverage with other private carriers at the same price or lower. There are some private insurers, he said, that want to “take all the [State Farm Florida] policies with no underwriting.” He said there are 15 companies with an interest in taking State Farm business but would not release their names because there are “fairly sensitive negotiations going on now.”

Mr. McCarty said some “quite substantial” offers have been made to State Farm, and that his office wants the company to have the ability to consider them “without any distractions.”

He said the company, if it wishes, can appeal his order within 21 days, which would have the effect of halting it.

State Farm has asked to nonrenew 470,000 policies in the first year, with its remaining policies nonrenewed over an additional two-year period.

Other requirements of the order include:

o State Farm Florida must surrender its Certificate of Authority within 30 days.

o State Farm must facilitate the orderly transition of policies from State Farm Florida to the private marketplace in a method directed by the Office of Insurance Regulation and shall not place any of the policies in Citizens.

o State Farm will not interfere with the appointment of its agents to other private insurance companies to place State Farm Florida policies directly with those other alternative carriers.

o In an effort to minimize the impact of market disruption on all of its policyholders, State Farm shall issue pro-rata refunds of premium to any insured seeking to voluntarily cancel or nonrenew a policy and will not short-rate the return premium for any policy in any line, whether it be auto, boat or property insurance coverage.

o State Farm shall consider all offers to buy or assume all or part of its business. A copy of any such offer shall be provided to the state within 48 hours of its receipt.

“State Farm intended to dump all of its customers into Citizens, and that is not acceptable for their customers or for the people of Florida,” Mr. McCarty said in a statement. “We have private companies that are eager to grow their businesses, and I expect State Farm to fully cooperate in facilitating a smooth transition of their policyholders to those companies.”

The commissioner said he has taken under advisement a second withdrawal request by State Farm Fire & Casualty to withdraw from Florida and transfer its auto policies to State Farm Mutual Automobile Insurance Company, which also insures homeowners. State Farm Fire & Casualty does not insure property owners in Florida, and under a 2007 Florida law a company that offers homeowners insurance–but not in Florida–can’t write auto.

State Farm said it will need to study the state’s order more closely, “but we do appreciate its quick consideration of the plan. We hope to have further conversations with the OIR to create an orderly process that is best for our customers, our agents and the marketplace.”

The carrier added that “it is our sincere hope that we can work with the OIR to establish a way for State Farm agents to service policies directly out of State Farm Florida into OIR-approved companies.”

“State Farm Florida already allows State Farm agents–with the state government’s backing–to service policies that are transferred out of Citizens to 16 OIR-approved companies,” the company noted.