Spanish Speaking Citizens' Foundation, Inc. v. Low (85 Cal. App. 4th 1179, 2000)

Opinion

HANLON, P. J.

The ballot pamphlet arguments for Proposition 103 passed by the voters in 1988 promised among other things that the initiative would “force[] insurance companies to base your [automobile insurance] rates on your driving record first, rather than on where you live. This means good drivers throughout the state will pay less than they do now, while bad drivers will pay more.” (Ballot Pamp., Gen. Elec. (Nov. 8, 1988) rebuttal to argument against Prop. 103, p. 101.) To those ends the following provisions were added to the Insurance Code:

“Rates and premiums for an automobile insurance policy . . . shall be determined by application of the following factors in decreasing order of importance:

“(1) The insured’s driving safety record.

“(2) The number of miles he or she drives annually.

“(3) The number of years of driving experience the insured has had.

“(4) Such other factors as the commissioner may adopt by regulation that have a substantial relationship to the risk of loss. The regulations shall set forth the respective weight to be given each factor in determining automobile rates and premiums. Notwithstanding any other provision of law, the use of any criterion without such approval shall constitute unfair discrimination.” (Ins. Code, § 1861.02, subd. (a).)

While these provisions may appear straightforward enough, devising regulations to implement them has been very difficult. Three Insurance Commissioners struggled with the problem before the present regulations were promulgated by former Commissioner Quackenbush in 1996. Interpretation of these regulations was contested in an administrative proceeding that concluded in 1998. Then this case was filed, alleging that the regulations as so interpreted contravene the statute. The trial court set aside one of the regulations, and interpreted the statute in a manner that may require yet another round of rulemaking. “ ‘Proposition 103 [has] proved to be a problem child from its inception’ ” (20th Century Ins. Co. v. Garamendi (1994) 8 Cal.4th 216, 247 [32 Cal.Rptr.2d 807, 878 P.2d 566]), and that is perhaps nowhere more apparent than in this area of automobile insurance rating factors.

This case potentially may affect everyone’s auto insurance premiums but it will not affect the overall cost of auto insurance in the state; what is at stake is only the distribution of premium payments among policyholders. It is anticipated that drivers in urban areas will see their auto insurance premiums decrease and that drivers in nonurban areas will see their premiums increase if the judgment below is affirmed. Thus, the cities of Los Angeles, San Francisco, and Oakland are among the parties on one side of the dispute, and the counties of Fresno, Madera and Mariposa are among the amicus curiae on the other.

However, it does not appear that any interpretation of the statute will uniformly benefit “urban” drivers at the expense of “rural” drivers or vice versa. For example, evidence has been presented that under the trial court’s ruling premiums paid by drivers in seven counties (Los Angeles, San Francisco, Sacramento, Orange, San Bernardino, Riverside and Ventura) will decrease, while premiums in the other 51 counties will increase. That evidence is challenged, but even if it correctly predicts the result of an affirmance the benefit or detriment would not be parceled out along strictly urban/nonurban lines. The 51 “rural” counties where premiums would increase include four of the state’s 10 largest urban centers, and at least two of the seven “urban” counties where premiums would decrease have considerable rural areas. Thus, while there is talk in the record and briefs about drivers in certain areas being made to unfairly “ ‘subsidize’ ” the premiums of those in others under different constructions of the statute, it is not always clear who would be subsidizing whom. It is also impossible to predict how different methods of calculating rating factor weights will affect the premiums of individual policyholders.

The ambiguities in this case begin with the language of Insurance Code section 1861.02, subdivision (a). Part of the problem is that this statute has been and may remain the only one in the country that refers to the “importance” and “weight” of auto insurance rating factors. Further difficulty is created by the need to harmonize the statute’s weight ordering mandate with its requirement that rating factors be substantially related to the risk of loss, and with Proposition 103’s overall aim of eliminating arbitrary insurance rates. The ballot pamphlet promises that rates would be based on driving record “first” rather than a driver’s residence, and that factor weight ordering would reduce good drivers’ premiums, must also be taken into account. (Ballot Pamp., Gen. Elec., supra, rebuttal to argument against Prop. 103, p. 101.)

In view of Proposition 103’s unprecedented and potentially conflicting demands with respect to auto insurance rating factors, it is perhaps not surprising that different Insurance Commissioners have advanced different interpretations of the factor weight ordering mandate, or that the parties challenging the current regulations have themselves taken inconsistent positions on what the law entails. There may be no one single correct interpretation in this instance. We nevertheless conclude that the current regulations, which were adopted after years of study and debate, lawfully implement Insurance Code section 1861.02, subdivision (a). We therefore reverse the judgment below.

I. Background

A. Calculation of Auto Insurance Premiums

(1) Base Rate

Auto insurance premiums are determined in two stages. The company first calculates a base rate for a particular type of coverage which is the same for each policyholder and reflects the total annual premium the company must charge all policyholders to cover its projected losses and expenses and obtain a reasonable rate of return. This first stage in the process is not at issue in the case. The base rate is then modified by applying a series of “rating factors” for each policyholder which determine how much the policyholder is charged and how the total premium the company receives is divided among the policyholders. This case concerns this second stage in the process.

(2) Rating Factors

Proposition 103 requires that driving safety record, annual miles driven, and years of driving experience be applied as rating factors (mandatory factors), and permits the application of other factors adopted by regulation, which have a substantial relationship to the risk of loss (optional factors). (Ballot Pamp., Gen. Elec., supra, text of Prop. 103, § 3, p. 99; Ins. Code, § 1861.02, subd. (a); Cal. Code Regs., tit. 10, § 2632.5.) The regulations permit the use of the following optional factors: (1) type of vehicle; (2) vehicle performance capabilities; (3) type of use of vehicle (pleasure only, commute, etc.); (4) percentage use of the vehicle by the rated driver; (5) multivehicle households; (6) academic standing of the rated driver; (7) completion of driver training or defensive driving course by the rated driver; (8) vehicle characteristics (engine size, repairability, etc.); (9) gender of the rated driver; (10) marital status of the rated driver; (11) persistency (years insured by the company); (12) nonsmoker; (13) secondary driver characteristics; (14) multipolicies with the same or an affiliated company; (15) relative claims frequency; and (16) relative claims severity. (Regs., § 2632.5, subd. (d).) Relative claims frequency and severity are “territorial” factors based on where the vehicle is garaged and the average number and cost of claims in that zip code or census tract. (Id., § 2632.5, subd. (d)(15), (16) .)

(a) Categories

Each rating factor is divided into two or more categories which determine whether the policyholder receives a discount or a surcharge. For example, the mileage rating factor could be divided into categories for high, average, and low. Those in the high category would be surcharged, those in the low category would receive discounts, those in the average category would see no change in their base premium.

(b) Relativities

To accomplish these adjustments, each category is given a number known as a “relativity.” Continuing the foregoing example and assuming that the rating factors are applied through a series of multiplications, the high mileage category could be assigned a relativity of 1.5, the average mileage category could be assigned a 1.0, and the low category a 0.5. If the base premium were $800, the premium of those in high mileage category would be increased to $1,200 ($800 x 1.5), the premium of those in the low category would be decreased to $400 ($800 x 0.5), and the premium of those in the average category would remain unchanged at $800 ($800 x 1.0). This process is repeated for all of the rating factors to arrive at the final premium. The process can be described as the multiplicative algorithm: premium = base rate x factor 1 x factor 2 x factor 3, etc., with high risk factors having a value greater than 1, average risk factors equal to 1, and low risk factors below 1.

(c) Sequential Analysis

The regulations require that the company’s relativities be initially determined through a “sequential analysis” of the rating factors. (Regs., § 2632.7.) Sequential analysis is a complex process which accounts for the fact that different rating factors (e.g., driving safety record and miles driven) may bear on risk in overlapping ways (e.g., the more one drives, the greater the likelihood of an accident). State Farm Mutual Automobile Insurance Company actuary Ina Becraft has summarized the process as follows: “[F]or each rating factor the loss and expense costs are determined for every category within that factor, and a relativity calculated based upon the relative cost to insure insureds within those categories. The analysis is performed in a prescribed sequence of factors, and the cost explained by prior factors is removed in the analysis of each subsequent factor. In that way, if there is a correlation of the risk of loss between two or more factors, the first factor analyzed will explain all of the risk of loss that it can and the second factor is confined to explaining the residual risk, to the extent the second factor explains that residual risk.”

The regulations establish the order in which the rating factors are to be analyzed (Regs., § 2632.7, subd. (b)), and direct that the sequential analysis “remove the variation in loss costs already explained by prior factors” (Id., § 2632.7, subd. (a)). The prescribed sequence tracks the order of mandatory and optional factors set forth in Insurance Code section 1861.02. The first mandatory factor, driving safety record, is to be analyzed first, followed next by miles driven, then years of driving experience, and then the optional factors the company uses. (Regs., §§ 2632.7, subd. (b), 2632.5, subd. (c).) The territorial factors of claims frequency and severity must be analyzed last, but the optional factors may otherwise be analyzed in any order the company chooses. (Id., § 2632.7, subd. (b)4.) Farmers Insurance Exchange actuary Jonathan Adkisson has testified that “the order in which the factors are analyzed is very important. If there is [a] correlation of the risk of loss for two factors, the factor analyzed first will be assigned the majority of the variation in costs. The second factor will receive only the residual (or uncorrelated) variation, after the data are adjusted.”

A sample adjustment had been prepared by consulting actuary Michael Miller. In Miller’s example, insureds in the category of 0 to 4 years of driving experience have a relativity of 1.95 for that rating factor before the application of sequential analysis. The relativity is greater than 1, which means that these drivers are considered a relatively high risk. “[T]he next step is to back-out the effects of the rating factors previously analyzed.” Under the regulations, safety record and miles driven are analyzed before driving experience. (Regs., §§ 2632.7, subd. (b), 2632.5, subd. (c).) In the example, drivers with 0 to 4 years experience have an average relativity of 1.1 after analysis of these 2 higher order factors. Since drivers in this category would be considered a high risk (relativity greater than 1) even before their driving experience is considered, a “downward adjustment” is made to the driving experience factor to “avoid[] double-counting the risk.” The unadjusted relativity of 1.95 for the driving experience factor is divided by the 1.1 average relativity from the previous factors to yield a lower relativity of 1.77 for driving experience.

(3) Weight

After the initial relativities are determined according to this process, the rating factors are given a “weight.” The weight of an individual rating factor is calculated with what is called a “single omit” formula, which measures the factor’s average influence on the premiums of the company’s policyholders. The difference between the total premium for each car and that premium without the single factor being weighed is calculated as an absolute number (i.e., without regard to whether it is positive or negative), the results of those calculations are added together, and the total is divided by the number of calculations to yield the factor’s “weight” or average effect on the premiums of all policyholders. (Regs., § 2632.8, subd. (c).) For example, if the company has three policyholders, the first has his or her premium increased by $75 by virtue of the driving safety factor, and the other two have their respective premiums decreased by $50 and $25 on account of that factor, the weight of the factor would be 50 ([$75 + $50 + $25] -s- 3).

(a) Alignment of Weights

The next step is to align weights in accordance with Proposition 103. Section 2632.8, subdivision (d) of the regulations provides that the factor weights “must align in decreasing order of importance as follows: driving safety record must have the most weight followed by annual miles driven followed by years of driving experience followed by the weight for the optional factor.” Under regulations section 2632.8, subdivision (a), one weight is to be calculated “for all the optional factors . . . taken together as a single factor weight.” Each factor weight is the factor’s average effect on the company’s premiums, and the single factor weight of the optional factors is the average of those averages for the optional factors. If the company uses 10 optional factors, two with weights of 6 and eight with weights of 1, the single factor weight of the optional factors would be 2 (the combined factor weight or premium effect of 20 [(2 x 6) + (8 x 1)] divided by the number of factors [10]).

The regulations thus permit the use of optional factors which, both individually and collectively, may have greater weight than any of the mandatory factors. A company, for example, could combine the optional factors posited in the preceding paragraph, with mandatory factors of driving record, miles driven, and driving experience having weights of 5, 4, and 3, respectively. Even though two of the optional factors would have weights of 6 (more than the weight of any mandatory factor), and. the optional factors would have an even greater combined weight or premium effect of 20, the weights would be considered in proper alignment because the single average weight of the optional factors would be 2 (less than the weight of each mandatory factor).

This result is exemplified by the weights of the rating factors used by State Farm, the state’s largest automobile insurer, for its bodily injury and property damage liability (BIPD) coverage. Insurers submitted for approval by the Insurance Commissioner “class plans” for their private passenger auto rates and premiums which identified the rating factors they used and the weights of those factors. (Regs., §§ 2632.3, 2632.8, subd. (a), 2632.10, 2632.11.) The weights of the three mandatory factors for BIPD coverage in State Farm’s approved class plan are 20.65 (safety record), 13.64 (mileage), and 10.51 (driving experience). The single factor weight for all of the optional factors is 9.82. Since the weights of the mandatory factors are aligned in the requisite order of importance, and the single optional factor weight (9.82) is less than the weight of the least important mandatory factor (driving experience—10.51), the factors are considered to be properly aligned under the regulations. {Id., § 2632.8, subd. (d).)

State Farm uses the following 10 optional factors: (1) the territorial factors of relative claims severity and frequency combined as one factor with a weight of 34.6; (2) gender and marital status combined as one factor with a weight of 25.10; (3) persistency (years insured) with a weight of 15.51; (4) multi/single car 14.52; (5) academic standing 2.70; (6) percentage use by driver 2.22; (7) driving safety education 1.51; (8) usage of vehicle 1.46; (9) mature driver improvement ,31; and (10) second driver characteristics .24. These individual optional factor weights add up to 98.2, far more than the weight of any of the mandatory factors. Some of the individual optional factor weights also exceed the individual weights of mandatory factors (the territorial factor and gender/marital status factor each exceed every mandatory factor, persistency exceeds mileage and driving experience, etc.). Optional factors both individually and collectively are allowed to have a greater weight than any of the mandatory factors because the average weight of the 10 optional factors is only 9.82 (98.2 4- 10), less than that of any mandatory factor.

(b) Pumping and Tempering

An additional step must be taken if the three mandatory factor weights and the single optional factor weight calculated both with sequential analysis and the single omit formula do not align in the requisite order (safety record-mileage-driving experience-optional factor). In that event, it is necessary to adjust the weight of factors by “ ‘pumping’ ” or “ ‘tempering’ ” their relativities. “ ‘Pumping’ ” increases the factor’s weight by moving the relativities further from 1; “ ‘tempering’ ” reduces the factor’s weight by moving the relativities closer to 1.

A previous example posited a three-category mileage factor, with a high mileage relativity of 1.5, an average mileage relativity of 1.0, and a low mileage relativity of .5. In that example, where a base rate of $800 was assumed, these relativities produce premiums for high, average, and low mileage drivers of $1,200 ($800 x 1.5), $800 ($800 x 1.0) and $400 ($800 x .5), respectively. If there are four drivers, one in the high mileage category, two in the average category, and one in the low category, the mileage factor would have a weight of 200. Two drivers would have their premiums increased or decreased by $400, two drivers would see no change in their premium, and thus the factor, on average, would change the premium by $200 ([400 + 0 + 0 + 400] + 4).

If the relativities for the high and low mileage categories were “ ‘tempered’ ” (moved closer to 1) from 1.5 and .5 to 1.2 and .8, respectively, then taking the same four drivers the weight of the factor would decrease from 200 to 80. The premium for the high mileage driver would be $960 ($800 x 1.2, an increase of $160), the premiums for the average drivers would be unchanged, and the premium for the low mileage driver would be $640 ($800 x .8, a decrease of $160). The four drivers collectively would see their premiums increased or decreased by $320 (160 + 0 + 0+ 160), and thus the average premium effect or weight of the factor would be 80 ($320 + 4). The opposite result would occur if the relativities were “ ‘pumped.’ ”

B. King v. Meese

In 1987, the year before Proposition 103 was enacted, King v. Meese (1987) 43 Cal.3d 1217 [240 Cal.Rptr. 829, 743 P.2d 889] rejected a challenge to enforcement of financial responsibility laws requiring drivers to have insurance. Portions of the majority and concurring opinions in that case help to set the context for the provisions of the Proposition at issue here. The majority wrote: “California is a so-called ‘open rate’ state, that is, rates are set by insurers without prior or subsequent approval by the Insurance Commissioner (Commissioner). (Ins. Code, § 1850.) This is not to say, however, that there is absolutely no regulation of the rates. California law does require that rates not be ‘excessive, inadequate or unfairly discriminatory.’ (Ins. Code, § 1852.) No rate is excessive unless: ‘(1) such rate is unreasonably high for the insurance provided and (2) a reasonable degree of competition does not exist in the area with respect to the classification to which such rate is applicable.’ (Ibid.) Risk classifications are permissible if based on any reasonable (i.e., actuarially sound), and not prohibited, ground. (Ins. Code, § 1852, subd. (d).) Although the term ‘unfairly discriminatory’ is not defined in Insurance Code section 1852, section 11628 of that code prohibits discrimination by an insurer with regard to issuance of policies, or the terms of such policies, on the basis of ‘race, language, color, religion, national origin, ancestry, or location within the same geographic area.’ ‘Geographic area’ is defined as an area ‘not less than 20 square miles,’ and is made up by combining a series of contiguous zip code zones. Under the statutory scheme, different geographic areas may be treated differently.” {King v. Meese, supra, 43 Cal.3d at pp. 1221-1222.)

In a concurring opinion, Justice Broussard, joined by Justice Mosk, addressed the “serious problem [of] insurance pricing practices which make automobile liability insurance prohibitively expensive for many of the urban poor.” {King v. Meese, supra, 43 Cal.3d at p. 1237.) The concurrence cited “exhibits verifying] that private insurance rates in South Central Los Angeles are two to three times as high as rates in other areas of the state, with the result that good driver rates in Los Angeles often exceed rates charged drivers with bad records in other areas.” {Id. at p. 1240.) The opinion noted that the antidiscrimination provisions of the auto insurance law (§ 11628 et seq.) had “been interpreted to authorize territorial rate differentials, so long as rates are uniform within 20-square-mile blocks,” with the result that “insurers can draw lines which have the practical effect of discriminating between applicants on the basis of race.” {King, at p. 1243.)

The concurrence also observed that there was no statutory definition of “ ‘unfairly discriminatory’ ” rates, and that the Commissioner had issued no regulations or decisions explaining when a rate would be considered unreasonable or discriminatory. {King v. Meese, supra, 43 Cal.3d at pp. 1240, 1242.) However, the Commissioner appeared to “assume that so long as a rate is actuarially sound it cannot be unfairly discriminatory or unreasonably high” {id. at p. 1241), and the concurring opinion thought that this assumption was “open to challenge. One can argue that it is unfairly discriminatory to use classifications which result in charging good drivers in some areas much more than bad drivers in other[] parts of the state; it could be considered unreasonable to price liability insurance at levels many cannot afford. Rates which took affordability into account, and weighted driving record more than residence, would go far to alleviate the problem caused by the financial responsibility laws” {id. at pp. 1241-1242).

C. Proposition 103

Section 1 of Proposition 103, under the heading “Findings and Declaration,” states that: “Enormous increases in the cost of insurance have made it both unaffordable and unavailable to millions of Californians. [H] The existing laws inadequately protect consumers and allow insurance companies to charge excessive, unjustified and arbitrary rates. fl[] Therefore, the People of California declare that insurance reform is necessary.” (Ballot Pamp., Gen. Elec., supra, text of Prop. 103, p. 99.) Among the reforms then listed is that “automobile insurance rates shall be determined primarily by a driver’s safety record and mileage driven.” {Ibid.) Section 2, under the heading “Purpose,” indicates that the Proposition was intended “to protect consumers from arbitrary insurance rates and practices, to encourage a competitive insurance marketplace, to provide for an accountable Insurance Commissioner, and to ensure that insurance is fair, available, and affordable for all Californians.” {Ibid.)

In addition to the rating factor provisions of section 1861.02, subdivision (a), the Proposition added section 1861.05, subdivision (a), which provides that: “No rate shall be approved or remain in effect which is excessive, inadequate, unfairly discriminatory or otherwise in violation of this chapter. In considering whether a rate is excessive, inadequate or unfairly discriminatory, no consideration shall be given to the degree of competition and the commissioner shall consider whether the rate mathematically reflects the insurance company’s investment income.”

In their rebuttal argument in the ballot pamphlet for the November 1988 election, the Proposition’s opponents maintained that: “RATES WILL INCREASE by an average 22% for two-thirds of the state’s drivers, according to the State Department of Insurance, because PROP 103 eliminates rating based on the driving safety record of your neighborhood and forces suburban and rural drivers to subsidize motorists in high-risk areas.” (Ballot Pamp., Gen. Elec., supra, rebuttal to argument in favor of Prop. 103, p. 100.) These claims were repeated in the ballot pamphlet argument against the Proposition, which alleged that the Proposition would: “Raise insurance premiums, in the long term, for the majority of California drivers. PROP 103 forces insurers to ignore the driving safety record of where you live and, instead, forces you to subsidize drivers in areas that have the highest insurance losses. For example, a 55-year-old suburban driver will end up paying more for insurance so that a young urban driver can pay less. A State Department of Insurance study recently predicted that this aspect of PROP 103 will raise rates for two-thirds of the state’s drivers—by an average 22%!” {Id., argument against Prop. 103, p. 101.)

We quoted the proponents’ rebuttal argument at the outset of the opinion. Harvey Rosenfield, the author of Proposition 103, wrote as chair of the group Voter Revolt to Cut Insurance Rates that: “103 forces insurance companies to base your rates on your driving record first, rather than on where you live. That means good drivers throughout the state will pay less than they do now, while bad drivers will pay more.” (Ballot Pamp., Gen. Elec., supra, rebuttal to argument against Prop. 103, p. 101.)

D. The Tempered Regulations

The rating factor provisions of section 1861.02, subdivision (a) became operative in November 1989; the Commissioner was directed by the statute to adopt regulations which implemented them (§ 1861.02, subd. (e)). The history of those regulations was recounted by the Department of Insurance (hereafter Department) in its May 22, 1996, Final Statement of Reasons, No. RH-338 (Statement) for adoption of the last of the regulations in their current form.

In 1989 and 1990, former Commissioner Gillespie adopted what came to be known as the “Tempered Regulations,” which “required that the weights assigned to various rating factors be ‘tempered’ so that—notwithstanding the weight that would be assigned to a rating factor if calculated purely on the basis of a sequential analysis of the mandatory and optional factors: the second mandatory factor in Proposition 103 (number of miles driven annually) would account for less of the premium than is accounted for by the first mandatory factor (driving safety record); the third mandatory factor (number of years of driving experience) would, in turn, account for less than the second mandatory factor; and, the weight of any and all optional factors used by an insurer would in turn be less than that accounted for by the third mandatory factor.” (Statement, supra, at pp. 2-3.) The Tempered Regulations further provided that premiums calculated with the tempered approach could not exceed either “the premium that would have been charged if calculated by a sequential analysis of all mandatory and optional factors,” or “the premium that was charged or would have been charged in the immediately preceding calendar year, as adjusted to reflect any increase in the consumer price index.” (Statement, supra, at p. 3.)

In an August 13, 1990, note appearing in the annotated Barclay’s California Code of Regulations (Register 91, No. 14 (Apr. 5, 1991) pp. 728.10 to 728.12) following title 10, section 2632.1 (Note), the Department explained the considerations that led to adoption of the Tempered Regulations. The Note indicated that the Commissioner had appointed an actuarial advisory committee with three members representing insurers, consumer groups, and the Department. The committee members agreed that the three mandatory rating factors should be applied in the statutory order, followed by optional factors designated by regulation, using a sequential analysis. (Note, supra, at p. 728.11.) The committee disagreed as to whether premiums should ultimately be set through what was called a “cost-based approach,” or rather through a “ ‘tempered’ ” approach which “would artificially strengthen the first three factors and give them more weight than they would otherwise be given in a cost-based system.” (Id. at p. 728.12.)

“The Committee members agreed that if the cost-based approach is utilized, even with the sequential analysis methodology, then legitimate Optional Factors will likely call for premium rates in certain urban areas, such as the Los Angeles inner city area, to be higher than those in most non-urban areas. The Committee members also agreed that if the cost-based approach is ‘tempered’ by overriding the ‘weight’ for the Optional Factors, then premium rates in non-urban areas will likely increase while rates in certain inner city areas will likely decrease.” (Note, supra, at p. 728.12.)

Commissioner Gillespie found it “very likely, probably to the point of certainty, that these Optional Factors would, on a pure cost-based system which bases premium on the risk of loss, account for a greater proportion of the risk of loss than would any one of or possibly all three Mandated Factors.” (Note, supra, at pp. 728.11 to 728.12.) Nevertheless, the Commissioner found “that the three Mandated Factors must be given the most weight, regardless of whether the result would otherwise be viewed as discriminatory, arbitrary or inadequate based upon actuarial science and a cost-based approach because the statutory language states that this must be done.” {Id. at p. 728.12.) “As a result,” the Note continues, “the Commissioner has determined that she cannot implement Proposition 103 according to its terms unless she ‘tempers’ the rating factors to provide that no Optional Factor may be given more weight than any of the Mandatory Factors. Further, the combined weight of the optional factors may not have more weight than any Mandatory Factor.” {Ibid.)

The Commissioner thought that the applicable provisions of Proposition 103 were in conflict, and that the significantly higher premiums in nonurban areas likely to result from the required tempering were a “serious problem.” (Note, supra, at p. 728.12.) Since “rates for many Californians will very likely actually increase and this result would be precisely the opposite of what the promoters and Proposition 103 promised it would accomplish,” the Commissioner found that she could “only harmonize the provisions of Proposition 103 which call for lower, not higher rates” by “forbid[ding] substantial rate increases as a result of such ‘tempering.’ ” {Ibid.) In so doing, she observed that: “Proposition 103 was voted on as a measure to lower insurance rates, not to raise them. Proposition 103 was intended to avoid arbitrary rates, not to impose them. Proposition 103 was intended to encourage competition, not discourage it. Proposition 103 was supposed to avoid excessive rates, not impose them. Proposition 103 was intended to avoid unfair discrimination, not to encourage it. Proposition 103 was intended to make insurance more available, not less available.” {Ibid.)

The Tempered Regulations were challenged in an action in Los Angeles Superior Court, in which Judge Miriam Vogel issued a preliminary injunction against their enforcement in May of 1990 shortly before her elevation to the Court of Appeal. (Judicial Council of Cal., Coordination Proceeding No. JCC 002419 (1990) Proposition 103 Implementation Cases (Proposition 103 Cases).) In her statement of decision, Judge Vogel reasoned that “the overriding concern in adopting Proposition 103 was to ensure that rates are neither excessive nor unfairly discriminatory,” and thus that “[a]ny rating factor adopted by the Commissioner must be consistent with the mandate of Section 1861.05(a).” She noted the Commissioner’s concession that the tempered regulations would raise rates in nonurban areas, and the Commissioner’s decision “to rectify this problem by imposition of a totally artificial cap on all insurance rates.” She also noted the Commissioner’s finding that “under a tempered approach some drivers would be required arbitrarily to subsidize other drivers’ rates in a manner that unfairly discriminates against them.” (Id., Statement of Decision.) She concluded: “There is nothing in Proposition 103 that requires abandonment of a cost-based approach; to the contrary, the requirement that no rate be inadequate, excessive or unfairly discriminatory, considered in light of the evidence before this Court, compels the conclusion that only a cost-based approach will afford consumers the relief they sought when they voted for Proposition 103. As with other provisions of the [Tempered Regulations], it appears that the Commissioner’s reason for rejecting a cost-based approach is her effort to solve social problems which simply are not subject to cure by her regulations or orders of this Court. Artificial weighting of rating factors is invalid; it is not actuarially sound and it results in unfairly discriminatory, inadequate and excessive rates.” (Proposition 103 Cases, supra, Statement of Decision.)

E. Interim Regulations and the Impact Analysis

Commissioner Gillespie appealed from the order granting the preliminary injunction, and to comply with the injunction adopted interim regulations in August of 1990 which provided for application of the rating factors through a sequential analysis.

Commissioner Garamendi took office in 1991 while the appeal from the injunction was pending, and indicated that he did not intend to reinstate the Tempered Regulations even if the appeal succeeded. In view of that development, the appeal was dismissed by Division Seven of the Second Appellate District in 1992, and the case was remanded to the trial court where it was eventually dismissed. (Allstate Ins. Co. v. Gillespie (Jan. 22, 1992, B050439) mod. Feb. 20, 1992 [nonpub. opn.].)

The Court of Appeal declined to reach “abstract questions” of rating methodology before Commissioner Garamendi had developed additional actuarial data and new regulations. (Allstate Ins. Co. v. Gillespie, supra, No. B050439.) The court thought that “[t]he pertinent portions of Proposition 103 are ambiguous to an extent which demands reasoned construction by the Commissioner beyond that contained in the record compiled by former Commissioner Gillespie as a prelude to intelligent judicial action.” One issue presented was; “Should [section 1861.02, subdivision (a)] be interpreted to maximize the [rate] reduction to a class consisting only of urban drivers or to maximize the number of ‘good drivers’ who benefit from a lesser reduction per driver?” In the court’s view, this was “a question best left to determination after Commissioner Garamendi has developed the predicate for his new regulations and promulgated them.” The opinion added that “[t]he present Commissioner’s eventual interpretation of the relevant statutory provisions will be entitled to great deference by this court if it is supported by the record and is compatible with the wording and purpose of Proposition 103.” (Ibid.)

While the appellate court thus declined to resolve the substantive issues, it ventured various observations about Proposition 103 and the parties’ positions to support its suggestion that the issues were appropriate for mediation. The court characterized the Tempered Regulations adopted by Commissioner Gillespie, as well as the sequential, or “ ‘cost-based,’ ” analysis advocated by the insurers as “extreme positions.” (Allstate Ins. Co. v. Gillespie, supra, No. B050439.) On the one hand, the opinion noted Commissioner Garamendi’s argument that “the very concept of ‘cost-based pricing’ as the term has been employed in this case ‘is at best only a rough approximation to neutral, scientific process, if not a complete fiction.’ ” On the other hand, the court found that arguments for the Tempered Regulations based on statements in the ballot pamphlet were not “nearly as clear cut” as they purported to be. Although the proponents of Proposition 103 had indicated that rates would be determined by driving record first, rather than residence, and opponents had warned that rates for nonurban drivers would increase, the court thought it a “fair inference” that “the voters in favor of the initiative rejected the arguments in opposition and accepted the rebuttal to these arguments to the effect that automobile insurance rates would be reduced for all good drivers.” (Ibid.)

Interim regulations providing for sequential analysis of the rating factors were readopted from 1990 to 1994. At the end of Commissioner Garamendi’s tenure in December 1994, the Department released an “Impact Analysis of Weighting Auto Rating Factors to Comply with Proposition 103” (Impact Analysis) based on the collection and examination of over 10 million records from the state’s 11 largest insurers over an 18-month period. (Id. at pp. v & vi.) The Impact Analysis covered approximately 80 percent of the state’s private passenger auto insurance market, and its analytical scope was “revolutionary in auto rate setting.” (Id. at pp. 29 & vi.) Among other things, “[e]very category used by every rating factor for every insurer and the rate associated with it was identified and programmed into a computer.” (Id. at p. 2.) The results disclosed “wide variations ... in how different insurers created and used the same rating factors,” and “[t]hese substantial variations from insurer to insurer appealed] to be arbitrary.” (Ibid.) It also appeared that “most companies were unable to link their loss data with their classification data, except in the most limited way.” (Id. at p. 31.) The Impact Analysis found that “[n]one of the insurers analyzed [were] currently complying with the requirements that auto premiums be determined by the safety record, mileage, and driving experience rating factors in that rank order.” (Id. at p. 3.)

The Impact Analysis compared the premiums currently charged with those produced by different models using rating factors with weights which were presumed to comply with Proposition 103. In order to derive current premiums which could be compared with those produced by different weighting methods, “it was necessary to transform each company’s current rating practices into a rating plan utilizing standardized factors.” (Impact Analysis, supra, at p. 31.) The difference or “dislocation” between the existing premiums and those produced by the models was considered to be “positive” (intended) to the extent that “[g]ood,” low mileage and experienced drivers paid less for their insurance, or “bad,” high mileage and inexperienced drivers paid more. The opposite results were viewed as “negative” (unintended) dislocation. (Id. at p. 39.)

The Impact Analysis rejected sequential analysis as a method of weighing factors because it “is not a method for measuring how much the rating factor influences the premium charged to consumers .... A factor could be the second factor developed and still have a very minimal influence on premium. ... [H] ... If a company had not previously performed a proper sequential analysis, just performing the proper sequential analysis could slightly increase the influence of the three required factors on premium. However, there is no guarantee that they will have more influence on premium than any other rating factor.” (Impact Analysis, supra, at p. 21.)

Two of the alternative models analyzed used weights determined by the “single omit” method. Ninety percent or more of the dislocation produced by these models was either positive, or considered “nil” (+/- 10 percent of current premium); only 5 percent or less was negative. (Impact Analysis, supra, at pp. 43-46.) Thus, the “major approaches examined . . . resulted] in primarily positive or nil dislocation.” (Id. at p. 55.) The Impact Analysis also found that “for most consumer groups there is not that much change in average premium [under the alternative models] from what is currently being charged.” (Id. at p. 42.) In Commissioner Garamendi’s view, the Impact Analysis thereby “demonstrate[d] that it is possible to meet the requirements of Proposition 103 without massive variations in premiums.” (Id. at p. vi, emphasis omitted.)

Of particular interest is what was meant by “meeting] the requirements of Proposition 103.” The Impact Analysis assumed that Proposition 103 “intended that the pricing of auto insurance be restructured so that the safety record, mileage rating, and driving experience factors have the greatest impact on the amount that consumers are charged for auto insurance.” (Impact Analysis, supra, at p. 7.) Tables on pages 110 and 111 of the Impact Analysis showed the optional factors used for the “single omit” models and listed different weights for those factors under various company plans which were deemed to be “in [c]ompliance” with Proposition 103. The weights of the three mandatory factors were aligned in the requisite descending order, and the weight of each individual optional factor was less than that of any mandatory factor. This alignment was evidently regarded as sufficient under Proposition 103. Although the Impact Analysis stated that “Proposition 103 requires territory to have less influence than safety record, mileage, and years licensed,” the “single omit” models used two territorial factors, “frequency” and “severity,” and the combined weight of those factors was allowed to exceed the individual weights of mandatory factors. (Id. at pp. 9, 110-111.) The Impact Analysis noted that the use of two territorial factors rather than one reduced the dislocation the models produced. (Id. at pp. 35, 74.)

The process of formulating regulations for the calculation of factor weights continued after Commissioner Quackenbush took office in January of 1995. Public investigatory hearings on the Impact Analysis were held in San Diego, Los Angeles, and Sacramento in April 1995. Regulations providing for sequential analysis of rating factors were approved and readopted as emergency regulations in February and June of 1995. In December 1995, the Commissioner held a public hearing and accepted written comments on proposed permanent regulations. (Statement, supra, at p. 5.)

F. Current Regulations

The relevant current regulations became operative in 1996. They include:

Regulations section 2632.4, which provides in subdivision (a) that “[n]o insurer shall use a rating factor which is not set forth in these regulations,” and states in subdivision (b) that “[n]o insurer shall use a rating factor . . . in a manner that does not bear a substantial relationship to loss.”

Regulations section 2632.5, which further defines the mandatory factors of safety record, mileage and driving experience (subd. (c)), and approves the use of the 16 optional rating factors we have previously listed (subd. (d)). The two territorial factors of relative claims frequency and severity in subdivision (d)(15), (16) consolidated more numerous territorial factors which had been used in the previous version of this section.

Regulations section 2632.7, which directs the manner in which sequential analysis is to be performed to “ensure[] the influence of a rating factor is properly counted.” The previous version of this section merely specified the order in which the factors were to be analyzed and did not otherwise “describe or define ‘sequential analysis[,’] thereby allowing each insurer to implement different interpretations and use different procedures.” (Statement, supra, at p. 8.)

Regulations section 2632.8, which provides for the factor weight determination challenged herein. Subdivision (a) states in full: “For each type of coverage, four factor weights shall be calculated, one weight for each of the three mandatory factors listed in Section 2632.5(c)(1) through (3) and one for all the optional factors (from Section 2632.5(d)) taken together as a single factor weight.”

Regulations section 2632.8, subdivision (c) directs how these calculations are to be made. This subdivision reads in full: “For every insured vehicle in the data set and each rating factor utilized in the class plan: ft¡] 1. First, calculate the premium using the initial relativities from Section 2632.7(c); ft[] 2. Second, calculate the premium excluding the rating factor being analyzed; ftQ 3. Third, calculate the absolute value of the difference between subdivision (c)(1) and subdivision (c)(2); [f] 4. The weight for the rating factor being analyzed is the summation of the amounts in subdivision (3) divided by the number of calculations.”

Regulations section 2632.8, subdivision (d) stipulates that “[t]he weights of the factors, as calculated in subdivision (c), must align in decreasing order of importance as follows: driving safety record must have the most weight followed by annual miles driven followed by years of driving experience followed by the weight for the optional factor.” The balance of this subdivision covers the process of pumping or tempering to adjust the factor weights if they do not initially align in this order.

G. The Administrative Proceeding

Fanners Insurance Exchange, Mid-Century Insurance Company, and Truck Insurance Exchange (collectively Farmers) and State Farm filed applications in February of 1997 for the Commissioner’s approval of their class plans under the current regulations. The Proposition 103 Enforcement Project (Project), a nonprofit organization founded and led by Harvey Rosenfield, filed petitions for a hearing regarding these class plans and that of the Allstate companies. The petitions were granted and the hearings were consolidated into one proceeding on the issue of the methodology for calculating the one combined weight of the optional factors. Consumers Union of U.S., Inc., and the Southern Christian Leadership Conference of Greater Los Angeles, Inc., (collectively Consumers Union) intervened on the side of the Project.

The dispute boiled down to two different ways of calculating the single weight for the optional factors under regulations section 2632.8. Under the “single omit” formula described above and in section 2632.8, subdivision (c), factor weights are determined by calculating the absolute value of the difference between the total premium for each car and the premium without the factor being weighed, adding those amounts together and dividing that total by the number of “calculations.” There was no dispute about the method of calculating the individual weights of the three mandatory factors under this formula. The absolute difference for each factor was determined for each car, those differences were added together, and this “sum of the absolute differences” was divided by the number of cars to yield the weight of the factor.

To return again to the State Farm example set out in part I.A.(3), (ante, pp. 1189-1192), the sum of the absolute differences for the safety record factor for the company’s 2,751,975 insured cars was $56,833,135 (policyholders in the aggregate had their premiums increased or decreased by that total amount by virtue of their safety records), and the weight of the factor was thus 20.65 ($56,833,135 h- 2,751,975). The average policyholder, in other words, had his or her premium go up or down $20.65 on account of his or her safety record. The sums of the absolute differences for mileage and driving experience were $37,534,388 and $28,916,715, respectively, and thus the weights of those factors were 13.64 ($37,534,388 -r 2,751,975), and 10.51 ($28,916,715 -r 2,751,975), respectively. This approach, as previously explained, measures the average premium effect of the rating factor on individual policyholders.

As for the fourth factor weight for all of the optional factors combined, the insurers followed the foregoing procedure for each of the individual optional factors for each car, then totaled the sums of the absolute differences for all of those factors, and then divided that total by the number of vehicles multiplied by the number of factors. In the State Farm BIPD example, the sum of the absolute differences for the “Usage of Vehicle” optional factor was $4,013,849, the sum of the absolute differences for the “Academic Standing” factor was $7,424,429, and so on, for each of the 10 optional factors State Farm used. The total of those 10 sums ($270,127,062) was divided by the number of cars (2,751,975) multiplied by the number of factors (10)—a denominator of 27,519,750—to yield an optional factor weight of 9.82 ($270,127,062 + 27,519,750).

Another way of reaching this figure would be to total the individual weights of the optional factors, and divide that total by the number of factors. In the State Farm case, the weight of the usage of vehicle factor would have been 1.46 ($4,013,849 -f 2,751,975), the weight of the academic standing factor would have been 2.70 ($7,424,429 -f 2,751,975), and the total of those weights, plus the individual weights of the other optional factors would have been 98.17. That total divided by the number of factors (10) would have been 9.82, the same number achieved in the preceding paragraph. The optional factor weight under the insurers’ method was thus the average weight of the individual optional factors. As previously noted, this method allows the weights of individual optional factors to exceed those of individual mandatory factors.

Consumers Union argued that if the insurers’ method of calculating the optional factor weight complied with regulations section 2632.8, then that regulation as so interpreted violated the factor ordering scheme of Insurance Code section 1861.02, subdivision (a). Consumers Union took the position that the statute required the weights of individual optional factors to be less than those of individual mandatory factors. The Project went a step further and submitted that the aggregate weight of the optional factors could not exceed the weight of any mandatory factor. The Project’s posthearing brief argued that the insurers’ method “subverts the legislative intent of [section 1861].02 by allowing optional rating factors, either individually or combined, to have greater importance in terms of dollar impact on premium than one or more of the mandatory factors.” (Italics added.) The Project’s expert witness, Bimy Bimbaum, likewise testified that the insurers’ method improperly “allow[ed] rating factors and relativities for optional factors, which in some cases individually but in all three cases taken as together have far greater impact, far greater importance in the determination of premium than one or more of the mandatory factors.”

Consumers Union argued that the insurers’ calculation was improper because it yielded only an average weight for all of the optional factors. Consumers Union pointed out that whereas individual factor weights measured the average effect of the factor on the premium, the single optional factor weight calculated by the insurers was an average of those averages. Consumers Union observed that “[t]he total premium effect of the ten optional factors [used by State Farm] taken together adds up to $270,127,062—the sum of the total premium effects of the ten optional factors.” Consumers Union noted that in the State Farm example “the total premium effect of all optional factors [$270,127,062] is 4.75 times greater than the total premium effect of the first mandatory factor, driving safety record [$56,833,135].” Another way of stating this would have been to say that the combined weight of all of the optional factors (98.2) was 4.75 times greater than the weight of the safety record factor (20.65). Thus, according to Consumers Union, the problem was that “the insurers are not calculating the average premium effect of the optional factors, and instead are substituting the average of the average premium effects.”

To ensure that weights were consistently measured in accordance with this argument and that the weights of optional factors individually and as a whole were less than that of any mandatory factor, Consumers Union could have endorsed a system where the single optional factor weight was simply the sum of the individual optional factor weights. This number in the State Farm case would have been 98.2, what Consumers Union described as the “total premium effect” of the optional factors ($270,127,062) divided by the number of vehicles (2,751,975). In that event, State Farm’s mandatory factor weights of 20.65, 13.64 and 10.51 would have had to be “‘pumped’” to more than 98.2, or the 98.2 optional factor weight would have had to be tempered to less than 10.51, to achieve the requisite alignment of factor weights.

Instead, Consumers Union endorsed a different method proposed by Project expert Bimbaum. Rather than calculating the premium effect of each optional factor separately for each car, Bimbaum proposed only one optional factor calculation per car: the absolute difference between the total premium and the premium without all of the optional factors. Bimbaum took the sum of those absolute differences for all cars and divided that figure by the number of cars to yield the single optional factor weight called for in the regulation.

The resulting optional factor weight was higher than the one produced by the insurers’ method, but lower than the figure produced by simply adding up individual factor weights. In the State Farm example, as we have noted, the individual optional factor weights added up to 98.2, and the optional factor weight produced by the insurers’ method was 9.82 (98.2 divided by

the number of optional factors [10]). In her testimony at the administrative hearing, State Farm actuary Becraft estimated that under the Bimbaum method the optional factor weight for State Farm’s class plan would have been approximately 55.8.

The difference between the 98.2 sum of the individual factor weights and the 55.8 weight derived from the Birnbaum method resulted apparently because the Bimbaum method measured the net effect of all the optional factors combined on the premiums for particular cars. Since some optional factors may increase the premium while others decrease it, the optional factors may cancel each other out to some extent when their effects are combined for each car. For example, if there were two optional factors, one that increased the premium by $10 and the other that decreased the premium by $10, those optional factors would be deemed to have a single factor weight of zero under the Bimbaum method. If there were two cars that fit this same profile, the optional factor weight would still be 0 ([0 + 0] * 2). The two factors would not “count” because they completely cancelled each other out for each car in the sample. However, these same factors would have weight in a system that determined individual weights for optional factors in the same manner as those weights are calculated for the mandatory factors. Again, that method is to determine the premium effect of the factor for each car, add those numbers up, and divide by the number of cars to measure the average premium effect of the factor per car. In the foregoing two-car example, each of the optional factors would have individual weights of 10 ([10 + 10] ~ 2), and the sum of those individual weights would be 20 (10 + 10), as opposed to the zero weight derived from the Bimbaum method.

In any event, what is of most interest is how the results produced by the Birnbaum method differed from those required under different interpretations of section 1861.02, subdivision (a). As previously noted, Consumers Union was of the view that the statute required individual optional factors to weigh less than any mandatory factor. Birnbaum acknowledged in his testimony that the optional factor weight calculated under his method could exceed the weight of a mandatory factor even if the individual weights of every optional factor were less than those of any mandatory factor. These calculations, he said, were “not comparable.” It thus appears that Birnbaum’s method went further in suppressing optional factor weights than a system which merely required that the weight of each individual optional factor be less than that of any mandatory factor.

On the other hand, Birnbaum’s method evidently did not go so far as to ensure that the sum of the individual optional factor weights did not exceed that of any mandatory factor. Birnbaum conceded that he had not studied the effects of his method on actual premiums, and that he had never gone through the process of pumping or tempering factors in a class plan to ensure that the optional factor weight as he calculated it was less than the weight of any mandatory factor. The insurers prepared charts for a sample of 10 cars which showed the results of the pumping or tempering required when the optional factor weight was calculated according to Birnbaum’s method. These examples showed that the sum of the individual optional factor weights could continue to exceed the weights of individual mandatory factors even after the weights of the optional factors were lowered relative to those of the mandatory factors by the pumping and tempering.

The insurers argued that the pumping or tempering of factors required under Bimbaum’s method would be so extreme that the resulting premiums would no longer “have a substantial relationship to the risk of loss” within the meaning of section 1861.02, subdivision (a)(4), and would be “unfairly discriminatory” within the meaning of that statute and section 1861.05, subdivision (a). The insurers further argued that the Project’s constmction would produce rates that were “arbitrary” and “[unjfair” within the meaning of sections 1 and 2 of Proposition 103, and would be more likely than the insurers’ interpretation to raise the premiums paid by good drivers. (Ballot Pamp., Gen. Elec., supra, text of Prop. 103, p. 99.)

The testimony of State Farm actuary Becraft was representative of the evidence presented in support of the insurers’ arguments. Becraft testified that, because of the pumping or tempering of factors required under Birnbaum’s method, good drivers in most of the state would pay higher BIPD premiums under that method than they would under State Farm’s interpretation. Conversely, under Bimbaum’s method more drivers who did not meet good driver criteria would have premium decreases, and fewer of those drivers would have premium increases, than under State Farm’s interpretation. Becraft also testified that there would be substanti