The insurance industry’s practice of using ZIP codes in determining automobile premiums is being challenged in Illinois.
Where you live is one of the biggest factors in how much you pay for insurance, but political activist Patrick Quinn says your driving record should carry more weight than your ZIP code.
“The current system is . . . discriminatory against any urban driver, especially good drivers,” Quinn said. “A good driver who lives in Chicago pays more for insurance than a bad driver who lives in the suburbs. People who live across the street from each other pay radically different rates simply because they have different ZIP codes.
“Using ZIP codes is not based on anything objective as to how you drive your car. It is tantamount to using race, which is illegal,” he said.
Quinn, a former state treasurer and a Chicago resident, is president of the Consumer Insurance Board, a group he formed last year patterned after the Citizens Utility Board (CUB), which he also created. He hopes his fledgling group can reshape auto insurance the way CUB has changed electric rates.
He plans to petition the Illinois Department of Insurance by spring to hold public hearings and issue new regulations under administrative law to prohibit what he calls “ZIP code discrimination.”
Quinn points to a consumer initiative California voters approved in 1988, Proposition 103, as a model of what could be done in Illinois.
Proposition 103 requires that premiums be set primarily by a driver’s safety record, number of miles driven per year and experience “in decreasing order of importance.” ZIP codes, gender and marital status can be used only as “optional factors” after the three primary factors are calculated.
“Clearly, the best way to do it in Illinois is the way it was done in California,” Quinn said.
However, if California’s experience is any indication, Illinois motorists shouldn’t hold their breath waiting for changes in their insurance premiums.
Though voters approved Proposition 103 in November 1988, the ZIP-code provisions did not take effect until December 1997. The nine-year delay was caused by legal challenges from insurance companies and administrative wrangling over new regulations.
Two other elements of Proposition 103 took effect after prolonged court fights. One reduced rates 20 percent statewide, and the other required that the state insurance commissioner approve rates.
After the regulations were implemented, lawsuits by consumer groups charged that insurance companies still used ZIP codes as a primary factor. A California Superior Court judge ruled in favor of the consumer groups last June, saying the state’s regulations do not implement Proposition 103.
As an example, the judge cited a major insurance company charging a young male driver $1,706 in San Luis Obispo, a city of 225,000 in central California, and $7,844 for the same coverage in Los Angeles. The only difference is the ZIP codes.
The judge has yet to issue a final ruling, but some of California’s major insurers say they will sue to block changes to the current regulations.
Insurance rates in Illinois also show wide disparity based on ZIP code.
Allstate Insurance Co., the second largest auto insurer in the country, and in Illinois, charges a 36-year-old married driver $1,349 to cover a Ford Taurus in the 60620 ZIP code on Chicago’s South Side. The same coverage costs $673 in Aurora and $605 in Danville in east- central Illinois.
The rates are from the Department of Insurance’s Internet site (www.state.il.us/ins), which posts sample premiums from the 360 companies issuing policies in the state.
Where a driver lives is “probably the single biggest factor in setting premiums,” said Mike LaMonica, Allstate’s vice president for pricing. Chicago residents pay higher premiums because they face “significantly more risk” that suburbanites.
“When we look at ZIP codes, what we’re looking for is the driving environment,” he said. “We’re not categorizing people by their race or where they live, but by their driving environment.”
Allstate often groups more than one ZIP code into a rating territory based on the “driving environment,” factors such as traffic density, road conditions, amount of on-street parking, theft rates and how often accidents wind up in litigation. Chicago has 59 ZIP codes, but Allstate divides the city into 23 rating territories.
“Geography is just a measure of the risk a person is exposed to in that driving environment,” LaMonica said. “The risk we (Allstate) are faced with is not so much based on how good the driver is as the environment in which he’s operating his car.
“A good driver in a high-risk environment is going to face more risks than a bad driver in a low-risk environment.”
If Illinois outlaws rating territories, LaMonica speculated that insurance companies would average premiums between what they charge in Chicago and the lower-cost suburban and Downstate areas. Insurance companies that don’t issue policies in high-risk areas such as Chicago would benefit under such a system, he added. “For companies like us that do a lot of business in urban areas, we’re the ones who would get hurt the most,” LaMonica said.
Insurance premiums in Illinois are set by the companies. A state law passed in 1977 requires that Chicago be treated as one rating territory for bodily injury liability, but all other coverage is unregulated.
Nan Nases, a spokeswoman for the Department of Insurance, defended Illinois’ rates as competitive with other states.
“Competition among the companies is what determines rates in Illinois,” she said. “We think that is preferable to any kind of rate regulation.”
A comparison of rates the department did in 1997 showed that Chicago ranked fifth among 10 cities with populations more than 1 million. Chicago’s rates were lower than those in New York, Los Angeles, Philadelphia and Phoenix but higher than rates in Dallas, Detroit, Houston, San Antonio and San Diego.
Of 35 cities between 100,000 and 350,000 people, rates in Peoria were eighth lowest and Springfield’s were fifth lowest. Among 15 cities of less than 50,000, Danville and Galesburg were the two lowest.
Eliminating ZIP codes as a rate factor may benefit some but is likely to hurt others, Nases said, adding that several other factors figure into the cost of insurance.
“If companies don’t have rating territories, if there is just one for the whole state, somebody who lives in a remote rural area will probably pay more,” she said. “It’s going to impact somebody.
“It’s not as simple as saying if there is one rating territory all the problems will be solved.”
Nases said she is not sure the insurance department has the administrative power to implement Quinn’s ideas, which may require legislative approval.
“I don’t feel comfortable saying one way or another,” Nases said. “We’ll just have to wait and see what his petition asks for.”
Quinn counters that a person’s driving record is more indicative of risk than his home address. “Geographic mind sets are just wrong,” he said. “The reason insurance companies are so in favor of the present system is that it’s easy to administer. They just have to punch somebody’s ZIP code into a computer.”
He dismisses warnings that some drivers will see rates rise if rating territories are outlawed. “Insurance companies have tried all kinds of scare tactics to warn about what could happen,” Quinn said. “The people whose insurance rates will go up are the bad drivers. That’s why in California, it was called the Good Driver Initiative.”
But in California, it’s still unknown who will benefit and who will pay more because of Proposition 103. “We don’t know what the insurance companies will do,” said Earl Luis, a staff attorney with Consumers Union, one of the groups that sued on behalf of California consumers.
“Rates for drivers in urban areas should come down, and in some urban areas by quite a bit. Whether rates go up in other parts of the state remains to be seen.
“The basic problem is that with ZIP codes, it’s not based on a person’s driving record. A person with a perfect record in poor urban areas pays more than a suburbanite with a poor driving record.”
Luis warns Illinoisans to gird for a long, hard battle if Quinn’s plans get off the ground.
“The most likely expectation is that the insurance companies will fight to the death,” he said. “That’s about the only thing you can say with certainty.”
