Three insurance industry groups have sued to block new state regulations that would require insurers to base their auto rates more on a driver's experience than on the ZIP code in which the car is registered.
The regulations, approved by the California Office of Administrative Law last week, are designed to bring auto insurance policies in line with Proposition 103, which California voters passed in 1988 over the objections of auto insurers.
Late Wednesday, the Association of California Insurance Companies, the American Insurance Association and the Personal Insurance Federation of California filed suit in Sacramento to block the changes.
The trade groups – whose members provide coverage for more than 90 percent of insured drivers in California – say the new rules will force insurers to raise rates for young drivers or drivers who have caused accidents or violated traffic laws.
In addition, they say, the regulations would push prices higher in rural regions, which now have below-average insurance rates because of their lower percentage of traffic accidents.
“Insurers will be forced to charge unfair rates, compelling a majority of drivers – particularly in rural areas – to subsidize premiums paid by other Californians,” said Sam Sorich, president of the Association of California Insurance Companies.
Insurance Commissioner John Garamendi, who drafted the new regulations, rejects such arguments.
“I've been at this since 1991, trying to enforce the provisions of Prop. 103, and the insurance industry has fought this every step along the way,” he said. “These lawsuits are the last dying gasps of their efforts to overcome the will of the people.”
Unless they win an injunction, the insurance companies have a month to submit plans to conform with the new regulations, and two years to fully comply.
Garamendi suggested insurers want to cling to ZIP codes because they have been “embedded in their historic marketing practices,” allowing them to target specific neighborhoods for their services.
“But that has resulted in the situation where a person might be paying higher insurance from their neighbor across the street just because they are in different ZIP codes,” he said.
Doug Heller, executive director of the Foundation for Taxpayer and Consumer Rights, whose founder Harvey Rosenfield wrote Proposition 103, said insurers like the status quo “because they have made so much money off of us. They're afraid that the $2 billion in profits that they made in 2005 from California drivers might come down.”
Most insurers in California use ZIP codes as their leading criterion for auto rates. The insurers argue that ZIP codes help them set rates more accurately than other factors.
But the emphasis on ZIP codes has led to wide disparities in the market. Drivers living in Del Mar, La Jolla and Coronado who have been involved in auto accidents or been ticketed for traffic violations may pay less for their insurance than drivers with spotless records in Chula Vista or City Heights.
And that's for a basic policy, not including comprehensive coverage, such as theft insurance, which could push rates higher in certain ZIP codes.
Proposition 103 required that auto insurance rates should be based mainly on a driver's safety record, mileage driven per year and amount of driving experience, although ZIP codes and other factors could also be taken into account.
Since the proposition passed, most insurers have fought hard to keep ZIP codes as their top criterion.
“We've been able to produce rates that comply with actuarial data rather than bogus public policy goals,” said David Snyder, vice president and assistant general counsel of the American Insurance Association.
With the help of a multimillion-dollar advertising campaign – aimed at convincing drivers in rural and suburban areas that their rates will go up under the new regulations – the insurers have gained support from community groups and municipalities in the Central Valley and other rural regions.
In their lawsuit, the insurers argue the new regulations would increase insurance rates for 60 percent of California drivers, particularly those in rural counties. Based on the insurers' claims of the effects on rural counties, the California Farm Bureau has also sued to block the regulations.
But at least one insurer – the Auto Club of Southern California, the state's fourth-largest auto insurer – believes it can cut rates even as it adopts the new regulations.
The Auto Club intends to remove ZIP codes as its top criterion for auto insurance by December, while reducing rates by an average of 7 percent.
“We wouldn't have made the change if we didn't think it would be successful and that we didn't believe it would be a pretty strong business,” said Auto Club spokeswoman Carol Thorp. “Our business is thriving, and we hope it will continue to thrive.”
Although most of its members are in urban counties, the Auto Club also operates in rural counties such as Kern, Tulare, Inyo and Mono. The insurer anticipates that rates will go down in all the counties in which it operates – urban and rural – with lower rates for 88 percent of its customers.
“The Auto Club's ability to change its emphasis on ZIP codes and lower rates for customers proves Garamendi's case,” Heller said. “You have to choose between some theoretical arguments from insurance industry spokesmen and the real experience of what an actual insurance company is able to do.”
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