ZIP Codes Still Big Factor in Auto Insurance Premiums

Dear Readers:

Take two drivers, one living in Irvine and one in Westminster. Everything about these drivers is the same, such as age, driving record, car and years of driving experience. Their only difference: ZIP code.

Chances are, the Westminster driver pays more for auto insurance. A California Department of Insurance survey of 1991 premiums found that, on average, a 30-year-old driver with one ticket in Westminster pays about $95 more than the same driver in Irvine.

It’s an even bigger difference for identical drivers living in different regions of California. That same 30-year-old driver pays $254 more by living in Orange County than by living in the Northern California county of Napa. Orange County was found by the state survey to be the second most expensive county for auto insurance.

Is it fair that drivers with the same record should pay more--sometimes much more--depending on where they live? Some think not, and one of the intents of Proposition 103, the insurance reform measure passed in November, 1988, was to eliminate or greatly reduce the effect that ZIP code has on auto insurance costs. But that reality has yet to come.

One of the many things Proposition 103 required was that insurers base premiums first on driver record, annual mileage and years of driving experience. After that, other factors were supposed to have a lesser effect on premiums, explained Proposition 103 author Harvey Rosenfield.

While the state’s current insurance regulations do set up that order, they lack provisions requiring secondary factors such as ZIP code to be less important, or carry less weight, than the mandatory factors.

For example, an insurer may find that it costs an average of $200 per customer to provide liability insurance, explained Department of Insurance rate analyst Shawna Ackerman. The insurer then looks at its losses to see how different factors change that rate.

First, the mandatory factors are examined. Annual mileage might be found to change the base rate by 0% to 25%. Then, secondary factors are considered. ZIP code may be found to change the base rate by -50% to 150%. When finished, the insurance company has ranges or amounts for all the criteria it will use when developing premiums for individuals, Ackerman said.

At many companies, ZIP code might have a much greater range or chance of raising a premium than the mandatory factors. New regulations are planned to change this and implement Proposition 103 as Rosenfield intended, so that the three mandatory factors cannot be outweighed by ZIP code. But why don’t they exist now?

After Proposition 103 was passed, Insurance Commissioner Roxani Gillespie had regulations drawn up to enforce Proposition 103’s anti-ZIP code provisions. Insurers filed suit, and a Superior Court judge in May, 1990, declared those provision of Proposition 103 invalid.

A second set of much weaker regulations were drawn up by Gillespie to govern insurers until the case could reach appellate court. By the time the appeal was heard, Insurance Commissioner John Garamendi had been elected and said he would draw up his own regulations. Therefore, the appellate court nullified the lower court’s decision, so that any further battles would center on Garamendi’s rules.

That brought Proposition 103’s anti-ZIP code provision back to life, but it was breathing through an old pair of lungs: the second set of weak Gillespie regulations.

Garamendi’s new rules are in the works, but drafting them has been a complex and lengthy task “akin to the Manhattan Project, only for peaceful purposes,” said Steven Miller, the state’s deputy insurance commissioner.

“People have every reason to expect that this work will be done, but in something that is so significant and will produce very significant changes throughout the state, it is something we want to do right,” Miller said.

Don’t expect to see any changes right away. The new regulations are certain to be challenged in court, and a court may find that giving ZIP codes or other factors heavier weight than personal records may be legitimate.

“Who is to say that your driving record should be more important than the density of the traffic that you drive in. That is a subjective statement, though an appealing one,” said Patty Lombard, spokeswoman for the industry-supported Western Insurance Information Service. “The reality is where you drive has a bigger impact than how you drive.”

Likewise, trying to decrease the importance of ZIP codes in comparison to other factors may be “impossible,” said Judy Mintel, associate general counsel for State Farm Insurance, the state’s biggest auto insurer.

“There’s no way we know of to develop auto insurance premiums where decreasing importance means decreasing dollar impact,” Mintel said.

On the other hand, Proposition 103 author Rosenfield said the voters will ultimately prevail.

“The insurers have no constitutional right to base the rates on territory or other factors, no matter what their statistics show,” Rosenfield said. “Just as courts in other states have upheld unisex life insurance rating, despite evidence that women live longer than men, there is no legal basis to interfere with the judgment made by the voters in requiring that rates be based on characteristics within their own control.”

In the meantime, what can the average motorist do to keep the premium down? Shop around. What one company considers to be a high-risk area may not be so worrisome to another company. Likewise, not all companies penalize a driver with a ticket in the same way.

To help in your search, you can order copies of the state’s premium survey for Orange County and other regions of California. The report shows premiums that would be paid by different types of drivers. To order, call (800) 927-HELP.

The department doesn’t know exactly when the next premium survey will be ready, but there is another survey on complaints that was issued in October.

Another source of consumer tips is the August, 1992, issue of Consumer Reports. It has a cover article on auto insurance and tips on getting the best deal and service.

Costly Insurance

Orange County drivers pay the state’s second-highest insurance premiums. A comparison by region or premiums for a 30-year-old driver with one ticker.* Los Angeles: $1,058 Orange County: $712 San Bernardino/Riverside: $594 San Francisco Bay Area: $566 San Diego: $509 Sacramento: $502 Central California: $478 Northern California: $458 * Premium assumes 12,000 annual miles and provides basic liability insurance, including bodily injury and uninsured-motorist coverage of $15,000 per person/$30,000 per accident, and property damage coverage of $5,000.

Source: California Department of Insurance

Pricing Your Premium: An Auto Insurance Primer

Depending on the driver, different factors such as ZIP code or driving record may raise an auto insurance premium’s price more than others. A look how factors affect premiums at Farmers Insurance, the state’s second largest auto insurer.

Why Use Farmers as an Example?

The California Department of Insurance says the Farmers Insurance rating plan is a good example of how auto insurance companies in general develop premiums.

What a Policy Covers

An auto insurance policy is made up of several different coverages, each with its own price. The major types:

When you or your car are at fault:

Liability: Pays medical bills, property damage for other parties. One of the biggest costs in a policy.

Medical: Pays medical bills of those in your car.

Collision: Pays for damages to your car in an accident.

Comprehensive: Pays for damages to your car caused by such things as fire or theft.

When other party is at fault but uninsured:

Uninsured motorist bodily injury: Pays medical bills of those in your car.

Uninsured motorist property damage: Pays for damages to your car.

Getting the Best Deal

Shop around: Premiums vary dramatically from company to company.

Get the report: A free premium survey for Orange County or other areas from the California Department of Insurance by calling (800) 927-HELP.

Other advice: The August, 1992, issue of Consumer Reports has a cover story on auto insurance, with advice on getting good prices and service.

Premiums and Rates: Not the Same Thing

A company examines its costs to find an average amount to charge drivers. This is a rate. Rates are adjusted by various criteria so that so-called risky policyholders pay more. These adjusted rates are premiums.

How Factors Affect Premiums

A sampling of how different factors affect liability coverage at Farmers: Driving record: Surcharge Good driver: -20% Good driver, one minor ticket: 5% One accident or minor ticket: 25% One minor ticket and one accident: 50% Two minor tickets: 75% One major ticket*: 100 * Such as drunk driving

Years of experience: Surcharge More than 9: 0% 6 to 8: 15% 4 or 5: 25% 3 or fewer: 35% Residence/ZIP Code: Surcharge San Luis Obispo: -40% Western Sierra: -18% Southeast Orange County: 10% North Orange County: 20% Coastal Orange County: 26% Central Orange County: 33% Woodland Hills: 86% Beverly Hills, South Central: 179% Driver type: Surcharge 55-year-old, drives for pleasure: -10% 45-year-old, commutes 10 miles: 10% 45-year-old, commutes more than 10 miles: 22% 19-year-old female driver: 50% 19-year-old male driver: 150% *

Car Type

Liability insurance is largely unaffected by the type of car driven. How some cars affect collision coverage: Car type: Surcharge Dodge Colt: 8% Ford Probe GL: 56% Honda Prelude Si: 105% Lexis LS 400: 225% Jaguar XJS Convertible: 400% All cars 1990 models.

*

Building a Premium

How Farmers Insurance would build a liability premium, often the biggest cost in an auto insurance policy, for three different people: Good driver in good area: Surcharge Rate: $226 Increase coverage to 25/50/10 *: +17% =$264 Good driver**: +-20% =$211 12,000 miles driven annually: + 10% = $233 8 years’ driving experience: + 15% = $267 28-year-old single male, commutes less than 10 miles: + 10% = $294 Anti-lock brakes: + -10% = $265 Lives in Irvine, 92174: + 10% = $291 Premium for liability insurance: $291 Good Driver in Bad area: Surcharge Rate: $226 Increase coverage to 50/100/40: + 34% = $303 Good driver: + -20% = $242 One minor ticket (ran red light): + 25% = $303 7,000 miles driven annually: + --- = $303 37 years’ driving experience: + --- = $303 53-year-old single female, car used only for pleasure: -10% = $272 Has two cars: -22% = $212 Lives in Beverly Hills, 90210: + 179% = $593 Premium for liability insurance: $593 Young, bad driver: Surcharge Rate: $226 Increase coverage to 15/30/10: + 6% = $239 Two tickets, one accident: + 100% = $479 20,000 miles driven annually: + 20% = $575 5 years’ driving experience: + 25% = $718 23-year-old single male, commutes more than 10 miles: + 80% = $1,293 Good student: -25% = $970 Lives in Santa Ana, 92703: + 33% = $1,290 Premium for liability insurance: $1,290 * 25/50/10 means that policy provides $25,000 medical coverage per person, $50,000 total medical coverage per accident and $10,000 coverage for property damage.

** “Good driver” is someone who has not had more than one minor ticket (such as running a stop sign) and has not caused an accident that injured someone in three years.

Note: Drivers are all nonsmokers. Also, changing the order in which above factors are considered are considered still yields same final premium.

Sources: California Department of Insurance; Farmers Insurance rating plan.

Researched by DANNY SULLIVAN / Los Angeles Times