Court Says Insurers Can Use ZIP Codes to Set Auto Rates

A state appeal court Friday upheld the right of insurers to use ZIP Codes to set auto insurance rates in California--dealing a setback to consumer advocates’ hopes of lowering rates for urban motorists.

In issuing its decision, the 1st District Court of Appeal in San Francisco reversed a controversial 1998 trial court ruling regarding Proposition 103. The lower court had ruled that former Insurance Commissioner Chuck Quackenbush shouldn’t have allowed insurance companies to base premiums largely on where a motorist lives.

Consumer advocate Harvey Rosenfield said Friday that he will appeal the court’s decision to the California Supreme Court.

“This is a big, big loss for the people of California, especially the people in Los Angeles,” who pay some of the highest auto insurance rates in the state, said Rosenfield, president of Santa Monica-based Foundation for Taxpayer and Consumer Rights. He said the court’s ruling ignores the intent of Proposition 103, the 1988 ballot measure that sought to rein in car insurance premiums in California.

But Candysse Miller, executive director of the Insurance Information Network of California, an L.A.-based insurance industry trade group, said Friday’s court decision is a victory for drivers.

“Despite how some might characterize it, it is good news for consumers,” Miller said. “Otherwise, those living in suburban areas would pick up the tab for other drivers in the state. Is that fair? The answer is no, and the court recognized that.”

In its ruling, the appellate court said Proposition 103 is contradictory. On one hand, the judges said, the law orders the insurance commissioner to protect drivers from arbitrary rates. But at the same time, it mandates that a person’s driving history--safety record, miles driven and years of experience--should be the most important factor in determining premiums.

The court said that where a motorist lives, not how he drives, is actually the most important factor in gauging risk of loss. Ignoring that makes the resulting rates arbitrary, the judges said.

“Thus, there is a conflict in the law which any set of implementing regulations must attempt to reconcile,” the court wrote.

“The current regulations manage to implement most of the law’s conflicting demands. . . . The regulations produce lower premiums for more good drivers than the other alternatives under consideration.”

Though consumer advocates said basing rates on driving records was intended to lower auto insurance rates for urban drivers, the court said abandoning ZIP Code-based pricing wouldn’t necessarily do that.

“It’s not always clear who would be subsidizing whom,” the court wrote in its 73-page opinion.

A spokesman for the Department of Insurance said its new commissioner, Harry Low, would have no comment on the ruling until he and his legal staff could review the decision in depth.

Rosenfield said he hoped that Low, who was appointed after Quackenbush resigned, would abandon Quackenbush’s fight and side with consumer groups.

But insurance industry insiders questioned whether Low would be willing to take the political risk of disrupting the insurance market. Several insurers left the state after Proposition 103 passed.

Los Angeles, San Francisco and Oakland, joined by consumer and civil-rights groups, sued Quackenbush in 1998 to try to stop the insurance commissioner from allowing insurers to use ZIP Codes in determining auto insurance rates.

Insurers contend that accident rates are higher in big cities; consumer advocates say that approach unfairly penalizes city dwellers.

A spokesman for Los Angeles City Attorney James Hahn declined comment on the ruling Friday, saying they had not yet read the decision.

Proposition 103 was passed by voters after auto insurance rates skyrocketed in California during the 1980s. In the mid-1990s, however, rates began to decline. Industry analysts attributed the drop to lower claims costs and the return of some insurers that left the state in the wake of Proposition 103. The state Department of Insurance says auto insurance rates overall dropped by more than 11.3% from 1995 to 1998.