SACRAMENTO – Ruling on the side of good drivers everywhere – rural and urban alike – a Sacramento judge rejected a lawsuit from the insurance industry and the California Farm Bureau Federation (CFBF) that challenged new regulations to base auto insurance rates primarily on your driving record – not where you live.
Superior Court Judge Loren McMaster granted a summary judgment ruling on Thursday that regulations adopted last August by then-Insurance Commissioner John Garamendi were consistent with Proposition 103.
Proposition 103 is the rate-regulation initiative adopted by voters in 1988 which requires that personal auto insurance rates be determined primarily by a person’s driving record – not their zip code.
“Most insurance companies are generally reducing rates across the board,” said Douglas Heller, executive director of the Foundation for Taxpayer and Consumer Rights (FTCR), in a telephone interview Friday.
“The expectation is that good drivers in Lake County will see stable rates or a reduction in rates,” Heller said.
Judge McMaster wrote: "The regulations simply track the language of (Proposition 103), which requires that driving safety record, annual mileage and years of driving experience shall have the greatest weight and importance in determining one's automobile premium.”
In the wake of the ruling, Ken Gibson, vice president of the American Insurance Association's (AIA) western region, stated AIA was disappointed by McMaster's decision, and that the merits of the case “have yet to receive a full hearing in court.”
“The fact also remains that as the regulations in dispute are more fully implemented, the unfair and arbitrary impact on thousands of auto insurance policyholders will be increasingly revealed,” Gibson said. “Once implemented, these regulations will force rural and suburban drivers to subsidize urban drivers that present a higher risk.”
On Aug. 16, 2006, the California Appeals Court rejected an effort by insurance companies and the CFBF to block enforcement of regulations ending zip code-based premiums, which were issued in July by Garamendi and required insurers to file a new pricing structure.
The first to file under this new structure, the Auto Club of Southern California, began lowering policyholder premiums by an average of $134 for 88 percent of its customers on Dec. 1, 2006.
Under Garamendi's rules, insurers can phase in the changes over two years as long as they corrected their premium structure by at least 15 percent in August.
As the FTCR points out, auto insurance is unique within the U.S. economy as the only product that most Americans are required by law to purchase, which is the case in California, but is provided exclusively by private industry on a for-profit basis.
And profits are good. California insurance companies earned more than $2 billion in profits in 2004 and California ranked first in the U.S. for profits in personal auto insurance, according to an insurance industry report.
A California Department of Insurance study last July found that in 2004 and 2005 insurance companies profited immensely from paying out fewer claims while the premiums charged to consumers stayed the same or increased – and their profits soared.
Garamendi’s study found that, “the more money these companies keep from your premiums, the less they pay out in claims.”
According to the FTCR, the goal for insurance companies is to obtain customers least likely to make claims. The same financial imperative also provides incentives for insurance companies to avoid paying claims, or at least delay claims as much as possible, creating an inherently adversarial relationship with consumers, the FTCR states.
“Add the record profits achieved by the auto insurance industry in recent years,” FTCR says on their Web site, “and the result is an incendiary pocketbook issue fraught with billions of dollars in consequences for both the nation's consumers and its insurance industry.”
And protecting record profits is what the insurance industry is trying to do. But why was the CFBF also a plaintiff?
According to the CFBF, “rural residents drive more miles to accomplish basic daily chores such as shopping, going to the doctor or taking children to school. The new rules sharply penalize rural drivers for that, even though they file fewer claims that cost less to settle.”
“Geographical differences will be taken into consideration,” Heller said Friday and the fact that rural drivers are required to drive more miles for services than urban drivers.
California drivers average 12,000 miles per year, but Lake County drivers average closer to 7,000 miles annually, according to a local insurance agent.
The new regulations won’t mean Lake County drivers – or other rural drivers – will be punished with higher premiums, Heller explained. The new system takes geography into consideration, he said, and other rural drivers in California have already seen rate reductions thanks to the new rate formulations.
The CFBF also has a financial interest to maintain the insurance premium status quo.
Nationwide, the sixth largest auto insurer in the US and expanding in California, began as a company founded in 1926 by the Ohio Farm Bureau. Nationwide and CFBF have a sponsor agreement – and CFBF members, nearly 92 million in California alone, receive a reduced rate to carry Nationwide health plans and Allied Insurance (a Nationwide company) for auto, farm and home insurance.
“This ruling affirms that the aggressive campaign against this pro-consumer initiative was for naught,” Heller said.
The bottom line according to Heller? If your insurance rates go up, find another insurance company with a better rate formulation for you.
E-mail Terre Logsdon at
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