The Consumer Federation of America (“CFA”) said that it has found that the nation's largest auto insurance companies usually charge more for auto insurance to shoppers who currently have a minimum limits liability policy than companies charge to those who have previously purchased higher limits insurance.
The CFA said in a statement that insurance experts who reviewed premium quotes from six companies in several cities called the practice “an unjust and actuarially unsound penalty on the poor.”
According to the CFA, insurance shoppers whose current auto policy covers up to $300,000 in bodily injury liability were offered that same $300,000 coverage for $1,849.57 per year on average in five communities across the nation. Shoppers whose current insurance only provides their state's mandated minimum liability coverage were quoted an average annual premium of $2,103.33 for the $300,000 policy. That was a $253.76, or 14 percent, surcharge for drivers solely because of their prior level of coverage.
“Auto insurance is not just mandatory in most states, it is an important asset protection tool,” said J. Robert Hunter, the CFA's director of insurance and the former insurance commissioner for Texas. “As folks' financial situations improve and they opt to buy more coverage, they should expect equal access to the products and services available to others. Pricing auto insurance based on drivers' prior purchases is both actuarially unwarranted and an entirely unfair tax for being poor.”
For its research, CFA sought online premium quotes for good drivers in six communities – Buffalo, New York; Denver, Colorado; Jacksonville, Florida; Prairieville, Louisiana; Simi Valley, California; and Towson, Maryland – from six of the largest auto insurers in the nation – Allstate, Farmers, Geico, Liberty Mutual, Progressive, and State Farm. Data from Simi Valley were excluded from the averages, the CFA said, because under California's insurance consumer protection law known as Proposition 103, insurance companies are prohibited from considering a driver's prior insurance coverage when setting rates and premiums.
For each city and company, CFA asked for two quotes for a policy offering extended liability coverage (“100/300,” which covers up to $100,000 for injury-related losses for each person injured by the driver and up to $300,000 for all injuries stemming from an at-fault accident).
The first quote was for a driver who had a 100/300 policy and the second quote was for someone covered by a policy that provided only the state's minimally required liability coverage (for example, 25/50 in Denver) but who wanted to increase insurance coverage to a more protective 100/300 policy. Other than the different prior coverage, the drivers tested were exactly the same within each city – same car, same address, same commute, and both had a perfect driving record for every test.
The CFA said that it found that drivers with lower prior limits paid significantly more in all cities tested except for Simi Valley.
GEICO and Farmers imposed the most severe penalty – 22 percent – on drivers attempting to increase their coverage, but all carriers tested increased rates by double digit percentages, according to the CFA.
“Most agents and brokers will recommend that customers with any assets to protect buy more liability coverage than the mandatory minimum set by the state, and those who buy only the minimum coverage are more likely to be asset poor and lower-income,” said CFA's Douglas Heller. “But one's poverty, as indicated by prior coverage, should never be used as a basis for higher premiums or as a barrier to better coverage. In fact, no state allows use of income to rate risks, and this is an unfair surrogate for income.”
According to the CFA, higher rates were not the only punishment imposed on lower-income drivers. Farmers Insurance, in one instance, did not provide a quote for the shopper with basic limits even though it offered a quote to the shopper who had more robust coverage. In another instance, it shifted the lower limits customer to its non-standard market affiliate, the CFA said.
State insurance commissioners should call for an immediate cessation of the practice of using prior insurance coverage levels as a factor in premium setting, the CFA asserted. “Charging different premiums for similar risks (same driving safety record, same number of miles driven, same car, etc.) is the definition of unfair discrimination in the insurance context. Further, use of income-related classes is illegal in all states,” according to CFA.
The CFA added that if commissioners refuse to take action, it will recommend that lawmakers order the commissioners to do so by enacting a model Fair Premiums Act with the following language:
A person or company selling auto insurance must not consider or use the amount or level of prior auto insurance coverage to underwrite or rate a driver, whether as new or renewal business.
In a statement, Dave Snyder, vice president for policy, research, and international for the American Property Casualty Insurance Association (“APCIA”), said that the CFA's report, “apparently does not consider the evidence that prior auto insurance limits correlate with the risk of loss. Regulators in nearly every state across the country have recognized this connection and approved the use of insurers using this as a rating factor.
“This report demonstrates the significant differences among companies and underscores the competitiveness of the industry and the importance of shopping.
“Nonetheless, we recognize that insurance can be costly for many families. Insurers are constantly pushing to reduce underlying costs that impact consumers. Medical costs, lawsuit abuse, theft, fraud, and preventable crashes account for almost 80 percent of every insurance premium dollar. We welcome CFA's partnership in addressing these cost drivers and insurance affordability.”
Victoria Spears
Victoria Prussen Spears is senior vice president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. A graduate of Sarah Lawrence College and Brooklyn Law School, Ms. Spears was an attorney at a leading New York City law firm before joining Meyerowitz Communications. She may be contacted at [email protected].