California’s fourth-largest provider of auto insurance has agreed to base its rates on safety and driving frequency rather than primarily on where a driver lives.
The plan, to take effect Dec. 1, would cut some $133 million from the annual bills of the club’s nearly 1 million California policyholders. The Automobile Club of Southern California announced the changes Monday.
Passed in 1988, Proposition 103 required rates primarily be tied to a person’s driving record, number of years licensed and total miles driven each year, not the ZIP code where a vehicle is registered.
Still, the changes have been held up. Insurers argued where a driver lives is an essential factor in assessing risks and costs. They persuaded former Insurance Commissioner Chuck Quackenbush to allow ZIP codes to remain a priority in setting rates. Quackenbush’s regulations and later court rulings kept the old rules largely in place.
In December, state Commissioner John Garamendi announced he would propose his own regulations aimed at fulfilling the mandate of Proposition 103.
“How safely you drive is far more important than the ZIP code in which you live,” Garamendi said.
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, Garamendi said.
As to why insurance companies base their rates on where a person lives, Garamendi said, “There’s no good reason for it in my estimation, perhaps it’s the history, perhaps it’s marketing practices and perhaps it’s even more onerous than that.”
The Auto Club’s decision sends a message to other insurers that “they can respect the wishes of the voters and make money at the same time,” said Harvey Rosenfield of the Foundation for Taxpayer and Consumer Rights. The Santa Monica attorney wrote Proposition 103 and has been working ever since to see it fully enforced.
By voluntarily accepting Garamendi’s rules before they take effect, the Auto Club is distancing itself from the combative stance taken by rival insurers.
Garamendi’s proposed regulations are under review at the California Office of Administrative Law. If cleared there, the rules would take effect after July 18.
Insurers would then have two years to comply fully with the new standards.
Five major insurance companies, including No. 1 State Farm Mutual Insurance Co. and No. 2 Farmers, spent more than $2 million attacking Garamendi’s rules in a television ad campaign before the June primary election. They have indicated they may sue the commissioner if he moves ahead.
With more than 5 million members, the Automobile Club of Southern California says it is the largest U.S. affiliate of the not-for-profit American Automobile Association. It offers services including numerous types of insurance, roadside assistance, travel planning, financial products, and safety programs, among others.
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