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A Court Decision Eviscerates Proposition 103, Reversing the Result of the Ballot Box

Los Angeles Daily Journal

        Pending before the California Supreme Court is the urgent plea of the state’s consumers to resolve a matter the court first addressed 14 years ago. At issue is the insurance industry’s pernicious practice of “territorial rating” – the use of motorists’ zip codes to determine how much they must pay for the auto insurance that they are required by law to buy.

        The arbitrary nature of the territorial rating system is easily illustrated: A motorist who lives in Los Angeles can pay 147 percent more for the same policy than an identical motorist in Irvine.

        In 1985, a coalition of community and low-income organizations challenged the state’s mandatory insurance law, arguing that it was unconstitutional to require motorists to buy insurance without protecting them against practices such as territorial rating, which made auto insurance both unavailable and unaffordable.

        In King v. Meese, 43 Cal.3d 1217 (1987), the Supreme Court noted: “There is a certain appeal to plaintiffs’ complaint that those with good driving records, who could possibly afford insurance if they lived in a more affluent area, are unable to obtain insurance in the area where they actually live.”

        Justice Allen E. Broussard, in a concurring opinion, emphasized that a resident of certain sections of Los Angeles or Oakland, “with a perfect driving record could obtain private [insurance] coverage, if at all, only by paying more than a resident of some other areas with a history of accidents and violations.” Broussard suggested that “rates which took affordability into account, and weighted driving record more than residence, would go far to alleviate the problem caused by the financial responsibility law.”

        Notwithstanding its recognition of the problem, the court upheld the mandatory insurance law, saying that the issue was a matter for the legislative branch. And that is where it was resolved – or so the voters thought.

        After unsuccessfully petitioning state lawmakers – industry lobbyists blocked dozens of citizen-sponsored reforms – the voters went to the ballot box. Finding that “the existing laws inadequately protect consumers and allow insurance companies to charge excessive, unjustified and arbitrary rates,” Proposition 103, the 1988 insurance-reform initiative, established a comprehensive regulatory system to “protect consumers from arbitrary insurance rates and practices … and to ensure that insurance is fair, available, and affordable for all Californians.”

        Specifically, Insurance Code Section 1861.02 ordered insurers to base premiums primarily upon three factors within a motorist’s own control: driving-safety record (as Justice Broussard had opined in King), the number of miles driven annually and a driver’s years of driving experience. These are referred to collectively as the “mandatory” factors.

        Section 1861.02 permitted other “optional” rating criteria to be utilized, but only if demonstrated to the insurance commissioner’s satisfaction that they “had a substantial relationship to risk of loss,” a requirement that was intended to prohibit insurers from utilizing unrelated and noncausal criteria, such as religion or income.

        However, under the statutory scheme, any “optional” factors approved by the commissioner could have only a minor influence on premiums. The commissioner was charged with responsibility for determining the premium weight for each rating factor that would effectuate the statutory requirements.

        Thus, Proposition 103 did not entirely eliminate the use of geographic factors, but, by requiring rates to be based principally on the three “mandatory” factors, greatly diminished the impact that territory could have, if any, upon a motorist’s premiums.

        The insurance companies focused most of their unprecedented $60 million campaign against the initiative on this provision. They argued that Proposition 103 “forces insurers to ignore the driving safety record of where you live,” as they put it in their ballot statement. But they failed to convince voters.

        The insurance industry’s campaign against auto-rating reform did not end with Proposition 103‘s passage, however. For 12 years, the insurers have fought to delay or defeat the enforcement of Section 1861.02 before state agencies, the Legislature and the courts.

        In 1989, Insurance Commissioner Roxani Gillespie issued flawed regulations intended to invite a legal challenge by the industry. In their suit, the insurers reversed their position: They now claimed that Proposition 103 itself compelled them to use zip-code rating. They argued that basing premiums on driving-safety records rather than zip code would discriminate against bad drivers in violation of Proposition 103‘s requirement that rates be “fair.” The case was ultimately dismissed as moot.

        Gillespie’s successor was John Garamendi, the first commissioner to occupy the post by election. Garamendi initiated a comprehensive review of proposals to implement Section 1861.02. Though delayed by the industry’s refusal to cooperate, his survey of 10 million California auto policies confirmed that zip-code rating raises rates for good drivers across the state, forcing them to subsidize bad drivers. It also determined that regulations proposed by the insurance industry would not comply with Proposition 103. Finally, it concluded that if Proposition 103 were properly implemented, most drivers with good safety records, lower annual mileage and more driving experience would pay less; bad drivers would pay more – exactly as the voters mandated.

        Unfortunately, Garamendi left office before he could complete new regulations. He was succeeded by Chuck Quackenbush. Fearful that Quackenbush would yield to pressure from citizen groups to correctly enforce the law, the industry orchestrated a legislative assault on Section 1861.02 in 1996.

        The bill was barely defeated by consumer groups, but the insurers’ had no reason to worry about Quackenbush. Ignoring Garamendi’s study, Quackenbush‘s regulations eviscerated Section 1861.02. A statistical subterfuge was employed to provide the appearance of compliance with the statute. Insurers submitted rating plans which, as before, based premiums primarily upon zip code. Consumer groups objected; after lengthy administrative hearings, Quackenbush upheld the insurers’ implementation of the regulations.

        Consumer groups then successfully sued Quackenbush in Alameda Superior Court. Spanish Speaking Citizens’ Found. v. Quackenbush, 796071-6 and 796082-2 (consolidated) (Alameda Super. Ct., filed 1998). The court ruled that the regulations violated the statute by allowing optional factors – specifically zip code – to outweigh the three factors specified by Proposition 103. Quackenbush and the insurers appealed.

        Few inside or outside the industry expected them to win the appeal. But last December, almost three years later, the 1st District Court of Appeal in San Francisco ruled that the voters could not supplant territorial rating. It upheld the Quackenbush regulations as a “lawful choice among imperfect options.” Spanish Speaking Citizens’ Found. v. Quackenbush, 85 Cal.App.4th 1179 (2000).

        The opinion is an exercise in result-driven judicial activism. It is settled law that courts may not second-guess the voters’ judgment on public policy. See Amwest v. Wilson, 11 Cal.4th 1243 (1995). To justify its intrusion into the voters’ authority, the Court of Appeal was forced to invent various ambiguities in the statute that would cloak a judicial rewrite.

        First, the Court of Appeal explicitly acknowledged that the Quackenbush regulations did not achieve the statutory purpose of basing rates primarily upon driving-safety record. However, the court complained that the statute was silent on how to implement that requirement. Equating silence with ambiguity, it accorded the commissioner enormous deference to resolve the ambiguity.

        Further, the court accepted the industry’s argument that a “conflict” among Proposition 103‘s provisions created ambiguity. Since industry actuaries insisted that zip code is “a more important determinant of risk of loss than any other single factor,” the court held that basing premiums primarily on driving safety record, as required by Proposition 103, would violate Proposition 103‘s own precatory prohibition on “arbitrary” rates. Proposition 103 itself, therefore, required that insurers be allowed to continue the use of territorial rating.

        What the voters enacted as a shield against an abusive insurance-industry practice became a sword in the hands of the industry to perpetuate the practice.

        The Court of Appeal’s unprecedented decision will have far-reaching impact. The California Supreme Court has itself twice rejected the argument that under Proposition 103, insurance rates must be based on actuarial-loss data. See Calfarm Ins. Co. v. Deukmejian, 48 Cal.3d 805 (1989); 20th Century v Garamendi, 8 Cal.4th 216 (1994).

        Unless reversed, the ruling will be used by insurers to evade all rate regulation under Proposition 103 and many other state laws, such as the Unruh Civil Rights Act, that govern the insurance industry. Indeed, the court’s reasoning would permit insurers to base premiums on race, religion or other improper classifications. Only insurance-company actuaries would be authorized to regulate insurance companies.

        Thus, it is astonishing that Harry Low, appointed by Gov. Gray Davis to succeed disgraced Insurance Commissioner Quackenbush, has endorsed the decision in a vague six-page brief urging the Supreme Court not to review the case.

        Finally, the Court of Appeal decision sends a profoundly discouraging message about the courts and our democracy to an already deeply disillusioned public. Here, the highest court in the state, addressing the inequities of territorial rating 14 years ago, directed the public to avail itself of the legislative process. It did so, writing the law using language suggested by the court itself. When a pro-industry commissioner sought to evade the law, the public asked the courts to intervene – as Proposition 103 itself anticipated.

        Now, in a judicial “gotcha,” an appellate court has rewritten the law to repeal the voters’ express mandate and handed the industry the victory it could not obtain at the ballot box.

        Meanwhile, the burdens facing motorists are even greater now than they were when the Supreme Court decided King. The mandatory-insurance law has been dramatically tightened, and fines for its violation greatly increased. Moreover, a 1996 ballot measure supported by Quackenbush blocks full judicial redress to uninsured motorists injured in accidents in which they are not at fault. See Quackenbush v. Superior Court, 60 Cal.App.4th 454 (1997).

        A coalition representing the interests of consumers and taxpayers is appealing the 1st District Court of Appeal decision. Only the justices of the California Supreme Court can put an end to this long-running travesty and restore the public’s faith in the integrity of the judicial and governmental process.


        Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights, is the author of Proposition 103.


Consumer Watchdog
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