Battle between urban, rural drivers looms

Next month, 18 years after California voters ordered an overhaul of the
pricing of automobile insurance, stringent rules are expected to take effect
to force companies to downplay the importance of a driver’s address when
setting rates. The move will directly affect the pocketbooks of millions of
motorists and drive a wedge between rural and urban drivers. Angry insurers
are contemplating a court challenge.

In the long, tangled legal fights over auto insurance, regulations have been
written before–and thrown out. The latest rules are the strictest
anti-redlining regulations to be crafted since the Proposition 103
insurance-reform ballot initiative was approved in 1988.

“This is going to change the way that insurance companies do business,” said
Doug Heller of the Santa Monica-based Foundation for Taxpayer and Consumer
Rights, which supports the new regulations. “You will see drunk drivers and
people with bad records facing higher rates, while good drivers and people
with lower annual mileage will have lower rates.”

Insurers vehemently disagree, contending that the new rules are unfair and
capricious, fail to follow court decisions, and reflect little linkage
between a driver’s risk and the cost to the insurer of providing coverage.

They note that drivers in six urban counties–Los Angeles, San Diego, Orange,
Sacramento, San Francisco and Alameda–likely would see rate decreases, while
motorists in 52 rural counties could see their rates rise.

Overall, some 62 percent of drivers would experience rate increases
according to insurers, who mounted a $2.4 million advertising campaign
against the commissioner.

The biggest decreases would be a 12.7 percent reduction in Los Angeles
County and 11.4 percent in San Francisco, while the largest increase would
be 38 percent in Imperial County, according to an estimate from the Personal
Insurance Federation of California (PIFC), an insurers’ trade association.

Privately, insurers also question Garamendi’s motives in pushing the rules
to cut rates in voter-rich urban areas as he campaigns for his new job as
lieutenant governor.

By far, the least happy are the rural counties. “All the data that we have
shows that our rates could go up as much as 35 percent,” said Inyo County
Supervisor Linda Arcularius. “Residents here are very concerned that rates
are going to go up here in order to have the rates lowered in urban
counties.” Inyo County has about 18,000 residents. Rural farmers also oppose
the new regulations.

Garamendi, who says insurers should base their rates “on how you drive and
not where you live,” submitted the new regulations earlier this month to the
Office of Administrative Law (OAL), a little-known state agency that reviews
regulations and decides whether they are legal and conform to the state
constitution. Approval is expected by July 18. After that, insurers will be
required to compute their rates, giving less weight to a driver’s
neighborhood. The changes will be phased in, with the rate cuts–or
increases–showing up when the drivers’ policies are renewed. Experts say it
likely will take a year before the changes appear in policies.

His regulations, first proposed in December, followed a series of town-hall
meetings throughout California during 2004 and 2005. Even those supportive
of new regulations complained that Garamendi took too long to craft his
latest rules, noting that he served from 1991 to 1995 in addition to his
current term.

Proposition 103 requires insurers to base their rates primarily on three
factors: the driver’s safety record, miles driven annually and years of
experience. The insurer can consider other factors–such as address, marital
status, length of time with the company, whether a smoker or non-smoker and
completion of an advance driving course. But the initiative requires the
bulk of the cost of coverage to be based on record, miles driven and
experience. Insurance rating formulas are complex, but, by one estimate, at
least 80 percent of a driver’s premium would be based on the top three
factors.

That is likely to please some consumers angered at high insurance premiums,
who say insurers gouge them simply because they live in urban areas–even
though they drive as safely as their rural counterparts. “What has
historically happened in California is that insurers have put a great
emphasis on ZIP code and marital status,” Heller noted.

But insurers say the regulations are deceptive–and illegal. They have
challenged the rules’ legality before OAL.

“The basic problem is that the regulations break the law. They are contrary
to the insurance code, which requires that rates must not be arbitrary and
that they must have a substantial relationship to the risk of loss. That’s
right out of Proposition 103,” said Sam Sorich of the Association of
California Insurance Companies (ACIC).

Jeff Fuller, the ACIC’s general counsel, agreed. The costs of medical
coverage, repairs, frequency of claims and litigation are higher in urban
areas than rural areas, and those risks must be reflected in insurers’
premiums, he said.

“Ninety percent of Californians are good drivers, but that’s not how you run
an insurance company, exclusively, because that doesn’t really tell you
anything about what you need to charge,” Fuller said. “Put another way, you
can drive 50 miles to work in Fresno and the likelihood of getting into an
accident is the same as if you drove 10 miles to work in Los Angeles.”

Heller, the most vocal backer of the new regulations, is not convinced.

“Sure, they have different rates. But what happens is that in the current
system, we have people who pay one amount, and people who live eight miles
away who pay hundreds of dollars more. We have to review these rates.”