Calif. Agency Approves Change in Auto Insurance Law

A state administrative office on Friday approved changes to California’s insurance law, clearing the way for regulations that will force insurers to base premiums on drivers’ records instead of their address.

The action should result in lower premiums for many drivers, said Insurance Commissioner John Garamendi. However, some of the state’s largest insurers said they would consider filing a lawsuit to stop the rules from taking effect.

The regulations, approved by the California Office of Administrative Law, will force insurance companies to comply with an initiative passed by voters in 1988, Garamendi said. The initiative required rates primarily to be tied to a person’s driving record, number of years licensed and miles driven annually, rather than the ZIP code where a vehicle is registered.

He said insurance companies’ current rating systems, which rely heavily on geography, allow insurers to discriminate by charging high rates for motorists living in ZIP codes they might not want to serve.

Consumers Union, the publisher of Consumer Reports, had petitioned Garamendi to strike down regulations adopted by a former insurance commissioner that allowed insurers to continue using ZIP codes in determining rates despite the provisions of the 1988 initiative.

“This is a major victory for consumers that will mean lower premiums for good and low-mileage drivers throughout the state,” said the group’s senior attorney, Mark Savage.

Insurance companies have argued that where a driver lives is an essential factor in assessing risks and costs. Five companies, including the state’s largest insurer, State Farm Mutual Insurance Co., and its second largest, Farmers, spent more than $2 million in advertising this spring attacking Garamendi’s attempt to impose the 1988 initiative.

“Evidence shows that where a car is driven and where a car is kept is a powerful indicator of whether or not a person will be involved in an auto accident. That’s a fact,” said Sam Sorich, president of the Association of California Insurance Companies.

The association will consider suing Garamendi, Sorich said.

The state’s fourth-largest insurer announced last week that it would comply with the law voluntarily starting Dec. 1. The change by the Automobile Club of Southern California, combined with a separate 7 percent rate cut, is expected to reduce premiums for 88 percent of its policyholders and raise premiums for about 12 percent, the company said.

“Today is an important day for drivers in California,” Garamendi said on Friday. “The Office of Administrative Law (OAL) has approved my regulations requiring insurers to place more weight on how safely you drive than on where you live when setting rates. This was the hope of voters who passed the landmark Proposition 103 in 1988 to end Zip code discrimination. I commend the OAL and Governor Schwarzenegger for moving the approval process along expeditiously.”

Insurers will now have 30 days to submit new rating plans to the DOI office that comply with the new regulations. From that point they will have a two-year phase-in period to fully implement their plans, Garamendi said.

“Until now, insurers have been able to set rates based primarily on ZIP codes or other optional factors, rather than on the three mandatory factors of Prop. 103: driving record, annual miles driven and driving experience. No more. I strongly encourage all insurers to follow the example of the Auto Club of Southern California in working with the Department to implement the regulations immediately, and in a manner that benefits their policyholders,” Garamendi added.