On July 31, 2009, the California Department of Insurance ("Department") issued revised, proposed regulations providing greater flexibility for auto insurers to determine the actual, verified miles driven by a policyholder, and for the first time permitting insurers to charge policyholders "by the mile." These revisions came five weeks after the Department received comments on the last revision, dated June 24. Many stakeholders continue to express concerns about the efficacy and the legality of the proposed regulations. Unless further changes are made, it appears that litigation may be likely.
Under Proposition 103 and the Department's regulations, insurers must determine rates for private passenger automobile insurance using three mandatory factors -- driving record, number of miles driven, and years of driving experience. Those three factors must be weighted in that sequence. In addition, insurers may use up to sixteen optional factors, such as age and marital status, but none of these optional factors may be given as much weight as driving experience, the third mandatory factor.
Under current law, number of miles driven is established by the policyholder's estimate of how many miles he or she will drive in the coming policy year. CCR Tit. 10, § 2632.5. Insurers are permitted to require certain, specified information to support the estimate. The proposed regulations would for the first time permit insurers to use the actual, verified miles driven in applying the second mandatory rating factor. Doing so is optional and insurers may continue to use an estimate of miles driven as they do now. Moreover, insurers may offer both estimated and verified actual mileage programs, but if they do policyholders must be given a choice as to which they prefer.
The proposed regulations set forth several different ways an insurer may determine actual, verified mileage, including odometer readings performed by the insurer or reported by the insured; odometer readings recorded by an automotive repair dealer; or odometer readings obtained from licensed smog check stations. In addition, the proposed regulations would permit insurers to provide the insured with a technological device to record the number of miles driven. The proposed regulations expressly prohibit such a technological device from being used for any other purpose, including collecting information about the location of the vehicle.
The proposed regulations provide a significant incentive to insurers to use actual miles driven because if they give notice prior to the effective date of the policy, they may retroactively or prospectively adjust premiums based on the actual miles driven.
There is a potential incentive for policyholders as well. If an insurer offers both an estimated mileage and an actual verified mileage program, it may provide a discount to policyholders who elect the actual miles program. The discount must be based on demonstrated cost savings or increased actuarial accuracy associated with using actual as opposed to estimated miles. How this is to be done is not spelled out in the regulation and certain comments regarding the proposed regulations question whether it can be done, both as a practical matter and consistent with the requirements of Proposition 103.
In addition, the proposed regulations offer insurers an option to charge policyholders "by the mile." Here, too, how this will work in practice is left unstated--which is the cause of much concern among many of those who commented.
Insurance industry trade groups commenting on the revised proposed regulations appear to be more satisfied with them than the previous version (released only five weeks previously), because many of the provisions to which they objected were eliminated. The result is considerably more insurer choice and fewer Department mandates. The most significant change was the elimination of the requirement that insurers use a minimum number of mileage bands. Insurers argued that they would not offer Pay As You Drive plans if the number of mileage bands were mandated.
Consumer and environmental groups, however, claim that this change eliminates the incentive for consumers to drive less. They point out that if a consumer in a mileage band of, say, 6,000 - 12,000 miles were to reduce his or her miles driven from 11,000 to 7,000, he or she would see no reduction in premium under the regulations as proposed.
The provisions relating to the use of a technological device have drawn severe criticism from groups interested in protecting consumer privacy. These groups assert that the language in the proposed regulation limiting the use of information obtained through such a device is not adequate to put consumers on notice or to protect their privacy. In fact, another state agency, the California Office of Privacy Protection, appears to be unsatisfied with the privacy protections afforded in the proposed regulation and recommended that the provision allowing the use of a "technological device" to measure mileage be eliminated and that insurers rely on the odometer.
If the proposed regulations are adopted as proposed, litigation seems likely. Comments reflect both procedural concerns -- that the Department should have issued a new 45-day notice due to the significant changes in this revision -- and substantive concerns -- that the proposed regulations violate Proposition 103. It appears that the road to enabling California motorists to pay as they drive will continue to be a bumpy one.