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Insurers lose steam in auto rate reg fight

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A California Superior Court judge has thrown out a lawsuit that challenged rules requiring auto insurers to base their rates primarily on drivers’ records instead of where they live, leaving insurance trade groups splintered.

On Feb. 15, the judge granted a summary judgment motion brought by consumer groups, several California cities and the Department of Insurance noting that the regulations adopted by former commissioner John Garamendi were consistent with a rate regulation initiative adopted by voters in 1988.

Once united in their legal strategy opposing the DOI’s regulation, the American Insurance Association, California Farm Bureau Federation, Personal Insurance Federation of California and Association of California Insurance Companies jointly filed a lawsuit last year. Yet with Superior Court Judge Loren McMaster’s recent ruling, only the American Insurance Association remains in the suit along with the California Farm Bureau Federation. The AIA says it’s assessing legal options, including a possible appeal of McMaster’s ruling.

Conflicting interests among the trade groups’ member companies are chipping away at their legal solidarity. Some insurers already have filed new rating class plans that fully phased in the new rating requirements to get a jump on competitors in urban markets, where the new class plans have largely produced rate decreases. Also complicating the associations’ case is the prospect that member companies could be required to disclose proprietary rating information that could fall into the hands of competitors if the case goes to trial.

McMaster’s ruling represented the second setback for the lawsuit in six months. Last August, McMaster declined to issue an injunction to keep the regulation from taking effect. Garamendi promulgated the regulation last year, one of the last tasks during his four-years in office. Early in his term, consumer groups and coastal cities petitioned Garamendi to review the previous auto rating factor regulation promulgated in 1996 by then-commissioner Chuck Quackenbush.

The Quackenbush regulation allowed auto insurers to assign substantial weight to location under Proposition 103’s optional rating factors. That resulted in higher premiums in more densely populated urban areas — where insurers say loss rates are naturally higher. Consumer groups and cities argued that rating scheme violated Proposition 103’s requirement that rates be primarily based on a driver’s safety record, annual number of miles driven and number of years of driving experience.

On the other hand, insurers and the Farm Bureau contended the regulation would lead to cross subsidization of auto rates that would require insurers to charge higher rates to motorists who live outside of urban centers and pose a lower risk of loss, thus subsidizing reduced rates in more loss-prone urban areas. The companies argued it would produce rates that violate a 2000 court ruling upholding the Quackenbush regulation, Spanish Speaking Citizens’ Foundation v. Low 85 Cal.App.4th 1179. Under Spanish Speaking, premiums must be substantially related to risk of loss and comply with Proposition 103’s prohibition against unfair or arbitrary rates, according to the AIA.

McMaster rejected that argument, finding Garamendi’s regulation complies with Proposition 103’s requirement that rates be primarily based on the three mandatory rating factors. The judge also determined there was no triable issue of fact in the case warranting a trial.

“The contents of the administrative record are undisputed,” McMaster opined. “Since this court has found that there is substantial evidence in the administrative record to support the commissioner’s decision, then defendant/intervenor are entitled to summary judgment as a matter of law.”

McMaster also ruled that as a matter of law, he cannot reweigh the evidence generated in the public hearing process preceding the DOI’s adoption of the regulation last year. “I don’t look behind the insurance commissioner’s decision,” McMaster said. “If courts were to independently weigh conflicting evidence in order to determine which side has the preponderance of the evidence, this would usurp the agency’s authority and violate the doctrine of separation of powers.”

Insurance Commissioner Steve Poizner praised McMaster’s ruling as “a victory for California ratepayers and for the Department of Insurance,” asserting that insurance premiums should be primarily based upon a motorist’s driving record, “not simply the ZIP code in which they live.” Poizner added that the ruling upheld the intent of Proposition 103. “But there is still work to do,” he said. “With my background in the high-tech industry, I look forward to exploring more innovative ways to arrive at the best possible rating system for auto rates.”

Poizner indicated he dislikes the use of ZIP codes as territorial units in setting auto rates, noting ZIP codes were designed for the efficient delivery of the mail, not for determining the risk of loss in auto insurance, which he said could lead to unfair situations in which one driver pays substantially more for insurance than another who lives across the street in a neighboring ZIP code. Poizner suggested alternatives including smaller geographical units, the use of census blocks and electronic mapping technology.


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