Insurance ‘Redlining’ Upheld by 1st DCA

Daily Journal

SAN FRANCISCO – Controversial state regulations allowing auto insurance companies to base premiums largely on where drivers live have won approval from a state appellate court.

        A panel of the 1st District Court of Appeal unanimously concluded Friday that the 1988 voter initiative known as Proposition 103 was lawfully implemented by former state Insurance Commissioner Chuck Quackenbush.

        The ruling overturned a trial court victory for consumer groups, which charged that the regulations violated Proposition 103 and resulted in huge premium disparities among motorists with similar driving records.

        Noting that three different insurance commissioners have struggled with Proposition 103 during a dozen years of litigation, the appellate court acknowledged “there may be no one single correct interpretation” of how the ballot initiative intended insurance rates to be calculated.

        But the panel rejected the argument of consumer groups that the ZIP code-based rating system promotes illegal “redlining” that forces city dwellers to subsidize suburban and rural residents.

        “While there is talk in the record and briefs about drivers in certain areas being made to unfairly ‘subsidize’ the premiums of those in others under different constructions of the statute, it is not always clear who would be subsidizing whom,” Justice Daniel Hanlon wrote, joined by Justices Marc Poche and Timothy Reardon. “It is also impossible to predict how different methods of calculating rating factor weights will affect the premiums of individual policyholders.”

        The court also said the drafters of Proposition 103 falsely assumed that safety records and other factors are more indicative of the insurance risk that drivers pose then where they live.

        “Unrefuted evidence establishes that territory is a more important determinant of the risk of loss than any other single factor,” Hanlon wrote.

        One insurance company spokesman praised the ruling Friday but said that he anticipates the case will wind up at the California Supreme Court.

        “We welcome at this point the stability this court’s decision will lend to the auto insurance market in California,” said William Sirola, of State Farm Insurance Cos. “Here we are more than 12 years past the passage of Proposition 103 and only now are we beginning to see some of the confusing and contradictory issues in this initiative dealt with in the courts.”

        Friday’s outcome was somewhat surprising because two of the justices, Hanlon and Poche, appeared reluctant during oral arguments in September to decide the fate of Quackenbush‘s policy just as the new commissioner replacing him was about to take office.

        A spokesman for Commissioner Harry Low, a retired 1st DCA justice, said Friday that Low and his legal staff were reviewing the 73-page ruling.

        “Pending completion of the review of the decision and its implications for the Department of Insurance, the department will postpone further comment,” said Mike Silva.

        Mark Savage, of Public Advocates, Inc., representing consumer groups, said Friday that he will likely petition the appellate court for a rehearing of the case.

        He said the court’s conclusion that where drivers live is the single most accurate predictor of safety risk skirts the mandate under Proposition 103 that insurers give greatest weight in setting rates to three factors: the driver’s safety record, annual miles driven and years of driving experience.

        In court documents, the cities of San Francisco, Los Angeles and Oakland are lined up on Savage’s side, while the cities of Fresno, Mariposa and Madera have sided with the insurance industry. Under the Quackenbush regulations, drivers in the big cities pay higher rates because it costs more to insure motorists in high-crime and high-accident areas.

        The regulations were struck down in 1998 by Alameda County Superior Court Judge Henry Needham. Friday’s ruling in Spanish Speaking Citizens’ Foundation, Inc. v Low, A084024, effectively reinstates the regulations.