The Half-Pregnant Public Policy on Car Insurance Rates
In my recent Law Journal article "Dirty Little Secret in Car Insurance: Can lawyers Lead a Change?" I explained the little-known practice of using income proxies in car insurance in New Jersey. Specifically, it brought to light the dirty secret that many of the publicly traded insurance companies, including those with very familiar household names, charge significantly higher rates to drivers with spotless driving records simply because they have lower paying jobs, are unemployed, or don't have at least a college degree, a credit score above 700, or own a home. Every day, the car insurance industry is wrongly considering these factors when determining the eligibility of, or calculating insurance rates for, a particular person. It should come as no surprise that this practice disproportionately harms low income and minority communities, essentially holding people back from economic opportunities simply because they are more likely to be poor.
Despite numerous consumer watch group studies and their criticism of this practice, drivers are not being notified that they are being charged higher rates or being sent to less attractive insurance companies on the basis of their socioeconomic status. The result—voters and consumers are not complaining. But a lack of formal and filed complaints does not mean that it is not happening and that the practice shouldn't be banned. The time for action is now.
A Regulation With No Teeth
By way of background, the Legislature for generations has explicitly banned rates, or the use of factors, that are "unfairly discriminatory". See N.J.S.A. 17:29A-7 ("Rating system, approval of; revision or modification"). Yet what is considered to be "unfairly discriminatory?" It seems to be subjective in nature, and I would argue it is why these obvious income proxies are being permitted. If the regulators believe a factor has a proven correlation to profitability (loss ratio), they could approve those factors for use because it can be interpreted that using such a factor is therefore "fair."
Oddly, back in 2008, the regulators at the New Jersey Department of Banking and Insurance (DOBI) identified factors that alone could not be used to reject a driver, explicitly stating in the regulations that it prohibits the use of "occupation, education or insurance score of the applicant" when insurance carriers are deciding whether to accept a driver. See N.J.A.C. 11:3-8.12.
It appears that at least some carriers have not followed the letter or spirit of that regulation. The New Jersey GEICO Automobile Guide to Company Placement, publicly available, indicates that as recently as 2010, GEICO did in fact consider education and occupation when deciding whether to accept applicants and how to place them into the various tiers of GEICO companies that operate in New Jersey. Specifically, this document explains "Education - Risks who have achieved at least a high school diploma or its equivalent are more favorable than those without a high school education. Bachelors, Masters, and other advanced degrees are considered most favorable." This "guide" goes on to provide sample education levels and occupations for eight different "group definitions." This troubling consideration of these factors clearly raises the question as to whether, or better yet, why this is still happening today.
Equally disconcerting is, if our regulators in 2008 recognized that these income-related factors have no "fair" place in at least part of the insurance application and rejection process, then why allow them at all? It seems like a distinction without a difference. I analogize it to saying a person cannot be rejected entrance into a restaurant based upon their race, but once they sit down and order food, they can be charged twice as much as the preferred race. Why are we being "half-pregnant" in our public policy when it comes to how these factors should play a role in car insurance rates or underwriting?
Community Impact of This Secret Practice
This is not a victimless problem. Charging secret and unaffordable rates to drivers simply because they are less educated, hold lesser paying jobs and have lower credit scores, regardless of whether they are a safe driver, prevents a family the fair opportunity to maintain a job. It strips a person of the ability to afford a car legally, relegating those individuals to bike routes and bus stops.
Sadly, this practice of discriminating against the poor is a widely known issue to public policy makers, yet we still do not see reform. According to a 2016 analysis by the Consumer Federation of America, major car insurers use income proxies as a basis for charging higher rates to safe drivers simply because they do not have a college degree or high paying job(https://consumerfed.org/cfa-studies-on-the-plight-of-low-and-moderate-income-good-drivers-in-affording-state-required-auto-insurance/("CFA Reports")).
Furthermore, in January 2021, Consumer Reports did a comprehensive study to understand the nature of auto insurance companies pricing practices. It specifically reviewed the use of education level and occupation, collecting hundreds of price quotes for one hypothetical driver, with the only variation made on education level and job category. For the study, Consumer Reports collected 869 unique online policy price quotes from nine auto insurers, using 21 ZIP codes in six states. The same driver profile was used for all quotes, with the only variation made to education level and job category. The research concluded that less formally educated applicants, or those in lower paying jobs, were quoted higher prices, regardless of driving record https://advocacy.consumerreports.org/wp-content/uploads/2021/01/Auto-Insurance-White-Paper-Report-FINAL1.26C.pdf ("Report"). See, also, Kaveh Waddell, "Why Your Education and Job Could Mean You're Paying Too Much for Car Insurance," Consumer Reports, Jan. 28, 2021.
This Consumer Reports study highlights the disparate impact these practices have on families of color, particularly Black and Hispanic communities, noting that in 2019, 40% of non-Hispanic Whites 25 years and older held a bachelor's degree or higher, compared to 26% and almost 19% of Black and Latinx Americans, respectively. It doesn't take a rocket scientist to know that lower educated people make less money in this country. Simply pick up a U.S. Census for the last 50 years to draw that conclusion.
This is made even more egregious when you consider that those living in urban areas and those with denser populations are already subject to higher premiums. It should come as no surprise that Black and Hispanic families are more likely than White families to live in these communities, and therefore start out behind the proverbial eight ball of higher rates.
New Jersey Must Do Better
Considering this is where I first discovered the practice of using education and occupation for car insurance rating in 2004, New Jersey should (and can) be a leader in preventing this discriminatory practice. Recently several states, including New York, Michigan and Washington, have curtailed the use of income proxies when establishing car insurance rates. There is also movement at the national level to stop this practice. In 2019, U.S. Representative and former New Jersey State Assemblywoman Bonnie Watson Coleman (D-NJ), alongside Representative Rashida Tlaib (D-MI), courageously stood up to corporate America and introduced the Prohibit Auto Insurance Discrimination Act (PAID Act), which would eliminate the use of such factors in car insurance rates. In September 2020, our own Senator Cory Booker (D-NJ) introduced the same legislation in the Senate.
It is time for New Jersey legislators to act. The Fair Auto Insurance (FAIR) Act A-1657/S-111 has already passed the New Jersey Senate and now awaits action by the New Jersey Assembly Committee on Financial Institutions and Insurance. If enacted into law, this legislation would dismantle one critical building block in the framework of inequality in New Jersey. All residents deserve fairness in the price they pay for coverage — a rate based on an individual's driving history and safety, and not on where a person works or whether he or she has a college degree. A ban on the use of these income proxies will not only create fairness in the cost of car insurance but will right a wrong that is long overdue.
Reprinted with permission from the August 2, 2021 edition of the NEW JERSEY LAW JOURNAL.© 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-256-2472, reprints@alm.com or visit www.almreprints.com. NJLJ-07302021-499597