New insurance regulations proposed by the California Insurance Commissioner would eliminate the use of zip code of residence in determining insurance premiums. 

The current regulations allow insurers to set premiums primarily by one's driving safety record, annual mileage, and years of driving experience--factors over which drivers have control.  Nonetheless, insurers in California and other states also have optional measures by which they can base one's insurance premium, including upon where one lives (ZIP Code) not how well one drives, and on other factors such as gender and marital status.

The Commissioner’s proposal is an effort to fulfill the intent of voter-enacted Proposition 103 and to establish fairness in a system that has engendered controversy since it took effect in 1988. Proposition 103 required that auto insurance premiums be based on three mandatory factors: driving record, miles driven, and years of driving experience. Other factors are allowed, but each must have less importance than each of the mandatory factors established by the voters. 

“For 17 years there have been competing interests fighting over the use of zip codes in the pricing of auto insurance in our state,” said Commissioner Garamendi. “I want to end the unfairness and the confusion. Auto insurers in California must base their rates primarily on how you drive and not where you live.”

To address this problem, Garamendi examined several proposals over a two-year period. Based on this examination, Garamendi introduced regulations in which no individual secondary factor can have greater weight than any single primary factor.

The new proposal, according to Bill Sirola, State Farm Insurance spokesman, “would require that no optional factors have greater weight than the least heavily weighted mandatory factor of years of driving experience."

This change would disallow greater weight given to ZIP code zones by insurers as a greater factor than the other optional factors allowed.  Sirola concluded that, “State Farm’s ultimate concern is that these regulations may lead to unfair subsidizing by some drivers at the additional expense of other drivers and could lead to rate increases in 52 of 58 counties in which State Farm operates.”

Rich Halberg, California Allstate spokesperson agreed by stating that this new regulation “substitutes political considerations for actuarial science and would require 60% of California drivers to subsidize insurance rates for those who drive in the more congested areas including Los Angeles and San Francisco.”

In May 2003, Consumers Union, the Southern Christian Leadership Conference of Greater Los Angeles, the National Council of La Raza, Spanish Speaking Citizens' Foundation, the Foundation for Taxpayer and Consumer Rights, and the cities of Oakland, Los Angeles, and San Francisco filed a petition with Insurance Commissioner John Garamendi to end these discriminatory practices.

Insurers charge good drivers living in California's predominantly African-American and Latino ZIP Codes substantially more for automobile insurance than good drivers in predominantly Caucasian communities, according to an analysis by Consumers Union, the non-profit publisher of Consumer Reports magazine. In some majority African-American communities, one major insurer charges good drivers an average $974 or 83 percent more for auto insurance than non-minority communities.

Basing premiums primarily on your ZIP code, gender, or marital status, rather than how you drive, petitioner’s believed, has severe economic and legal consequences for all drivers. Consumers Union used insurers' filings with the California Department of Insurance to calculate the leading auto insurers' premiums for the same good driver with the same driving record, driving the same car with the same coverage, changing only the driver's ZIP Code.

The results illustrate the severe impact of insurers' ZIP Code rating: For a female good driver, licensed 22 years without a single accident or violation, a mere change in ZIP Code could result in premium increases of 111-238 percent, or $1,050 to $1,700 per year, merely by changing her ZIP Code only.

John Kehoe, policy chair for the California Senior Advocates League strongly disagrees with the new regulations.   “Commissioner Garamendi is proposing a plan to modify auto insurance regulations that dramatically reduces the weight given to location and zip code when insurers calculate auto insurance rates.”

Kehoe states that premiums will likely increase for millions of drivers and end up harming more people, particularly seniors living on fixed incomes, than it will help. “It is simply not fair to ask good drivers, seniors, rural drivers and others to subsidize drivers in more densely populated regions of the state. But that is exactly what would happen under the new regulations,” Kehoe continued.   

Examples under current regulations

Consumers Union found that California's three largest insurers (State Farm, Farmers, and Allstate) charged a female driver with a perfect record and 22 years of experience an average $152 or 12.9 percent more in predominantly Latino ZIP Codes, and $704 or 59.7% more in predominantly African-American ZIP Codes, than in predominantly non-Hispanic White ZIP Codes.

Insurance rates charged in neighboring ZIP Codes throughout the state reveal this racial disparity. Farmers' insurance rates in the adjacent Los Angeles ZIP Codes of Westchester (90045), Baldwin Hills (90056), and Inglewood (90301) illustrate the discrimination found in the study.

Drivers in the predominantly African-American and Latino communities of Baldwin Hills and Inglewood pay $951 (66%) and $899 (62%) more, respectively, for insurance than the same good driver pays in the predominantly Caucasian town of Westchester.