Why are the rules different for auto insurance companies in California?

August 28, 2018
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Insurance companies which elect to do business in California have to follow a completely different set of rules than they use in any other state due to Proposition 103 which was passed back in 1988. This means that the insurance companies have to program their systems and train their people specifically for California at great expense (most companies will have California specific underwriting and claims departments who only handle California).

Why do companies agree to this to conduct business here? First, California is the 5th largest economy in the world. I remember when Prop 103 passed in 1988; every company that I represented contacted me by phone telling me that they were going on moratorium. In other words, they stopped writing any new business until they could figure out how to deal with this new law. I had nothing to sell! Within a few days, they all came back simply because leaving California would be a financial disaster for them.

How does Prop 103 work?

The main portion of Prop 103 that affects us all is how insurance companies are required to rate auto insurance. The three main factors each company must consider include:

  • A person’s driving record
  • How long somebody has been driving
  • How many miles somebody drives annually

The first one makes sense. If you are a lousy driver, you should pay more for auto insurance. The second one makes sense as well. It used to be that a newly licensed driver who is older would pay less than a younger driver with more experience. Now, years of driving experience is a factor no matter how old the driver is. If a 19 year old driver has been driving for at least three years, he or she qualifies for a 20% good driver discount as long as the driving record is good whereas a newly licensed 28 year old driver does not qualify for the good driver discount until he or she has been licensed for at least three consecutive years.

The third factor (annual mileage) is the most abused factor. Consumers and even some insurance agents use insufficient annual mileage to gain a competitive advantage over another agent who legitimately has a lower rate without putting the client at risk of having a claim denied. If you haven’t seen it already, you will soon see more “certified mileage” programs popping up. Each insurance company may call it something differently but companies are starting to offer a discount to those who agree to be part of their certified mileage program.

In exchange for the premium discount, the consumer agrees to let the insurance company use third party data (from oil changes, smog checks, etc.) to obtain prior odometer readings to determine the actual annual mileage that somebody drives annually. The cons of this include those who underestimate how much they really drive in a year and those who take a long driving trip.

When Prop 103 was on the ballot back in 1988, I recommended to my clients that they vote no on it because territorial or zip code rating would be lessened. This means that San Diego County who had some of the lowest rating bands in the state would be compromised to help offset the rates in Los Angeles and San Francisco. In other words, I warned my people that we would pay more to help those in LA and San Francisco (where the accident rate and crime rate were much higher) have a lower rate. We would be subsidizing them. Well, 54 of the 58 counties in California voted no on Prop 103 but Los Angeles and San Francisco Counties of course voted yes which lead to the passage of the proposition.

Are there any other oddities in California as a result of Prop 103?

One of my pet peeves is when I see a nationally run auto insurance commercial touting some great feature of their program which is not legal in California because of Prop 103. For example, Liberty Mutual talks about “accident forgiveness”. Most people don’t read the small print at the bottom of the TV screen which states that accident forgiveness is not available in California. I see this as a form of false advertising which should be illegal.

California is also a “file and use” state as opposed to a “use and file” state. This means that an insurance company must submit a filing with the California Department of Insurance for any changes in rates or rules and they must be approved by the department before the company can use them. I like “use and file” more because the companies can start using their new rates and/or rules right away while the insurance department is sorting things out. This way, the market dictates who gets the business and who doesn’t. It’s called free enterprise and works in most other states.

--Ken May