All New Jersey Drivers Deserve Transparency and Trust
The author points to several laws that were clearly created to help protect lower income drivers and prevent car insurers from surreptitiously and unfairly discriminating against unsuspecting consumers, but which simply no longer have any "teeth."
Over the past couple of months, I unmasked "A Dirty Little Secret in Car Insurance" (N.J.L.J., July 12, 2021) and spoke of a "Half-Pregnant Public Policy" (N.J.L.J., Aug. 2, 2021)—all to bring awareness to how income proxies have been used in the New Jersey car insurance marketplace, secretly harming many safe drivers simply because they happen to have the lowest incomes. While I have personally crusaded against these proxies now for over the past 16 years, I felt I should also shed light on other New Jersey insurance laws that were originally meant to protect consumers that have also been eroded. Specifically, I point to several laws that were clearly created to help protect lower income drivers and prevent car insurers from surreptitiously and unfairly discriminating against unsuspecting consumers, but which simply no longer have any "teeth."
The Protection Against 'Unfairly Discriminatory' Rates
Like most other states that mandate car insurance, the New Jersey legislature has language in place to protect consumers from rating factors that are "unfairly discriminatory."
Specifically, at N.J.S.A. 17:29A-7, New Jersey's rating law reads in part:
If ... the commissioner shall find that such rating-systems ... provide for, result in, or produce rates that are ... unfairly discriminatory between risks in this State involving essentially the same hazards and expense elements, he shall issue an order ... directing that such rating-systems be altered ... to produce rates that are reasonable and adequate, and not unfairly discriminatory.
While the words on paper may be black and white, the question "What is considered to be unfairly discriminatory?" has been creatively redefined over the years. How could factors such as education, occupation, and credit score, be deemed fair when all one needs to do is pick up the most recent U.S. Census to see a clear link between these factors and income.
So, how did my fellow car insurers get these factors approved with this law in place? By showing the link to profitability and their use. If the regulators believe a factor has a proven correlation to loss ratios (a profit measurement), the factors can be "fair" and therefore the regulators approve them.
Let's Start With the Basics
The purpose of insurance is to protect against a future unpredictable loss and share such risks among a group of other members so that one unfortunate event, whether a car accident, fire or other casualty, will not financially devastate any one individual. Instead, the pooling of these risks allow affordable protection to be spread across an entire group. This is a centuries-old concept dating back to Chinese merchants who sought a way to protect against financial ruin if their ship were to sink in transit. Therefore, in essence, the best measurement of a successful mandated insurance market is the ability for everyone to afford a required insurance policy.
Against this backdrop, 20 years ago New Jersey looked to "help bring those uninsured [drivers] into market by giving them a lower cost option" and mandated that all insurance carriers in the state offer a "Basic" policy. The rationale behind creating the basic policy was clear: "It is anticipated that individuals purchasing this policy would be those with few tangible assets to protect as well as lower-income persons who cannot now purchase insurance because it is unaffordable." To paraphrase further, the legislators saw this as a way to reduce the number of uninsured drivers by offering less coverage at a lower cost. See N.J.S.A. 39:6A-3.1 and N.J.A.C. 11:3-3.3.
This all sounds good and, might I say, reasonable, right? If we require insurance companies to sell a minimum of 10 apples and they charge $10.00 for those apples, by reducing the required minimum to five, the cost to would change and be reduced to $5.00. You can't get more straightforward than this approach.
Unfortunately, the well-intentioned goals did not materialize due to a major flaw in the process of implementation. Because at that time the regulators allowed the car insurance companies to re-file different and higher rates for Basic policies. So, despite a car insurance company offering less coverage than a standard policy, insurers were allowed to charge more for it, which negated the cost saving effects of the law.
The Right for Public Inspection of Car Insurance Rate Filings
When one uses the word "transparent" in business, it is meant to relay a sense of openness and candor. In establishing laws, a major concern is when the government creates a requirement of its citizens and then allows privatized, for-profit companies to service that directive.
This is clearly the case in New Jersey when it comes to requiring that all drivers carry car insurance. The state's law on public records as it relates to insurance underwriting rules is rather clear. Since 1997, in accordance with New Jersey law, all underwriting rules shall be "subject to public inspection." See N.J.S.A. 17:29A-46.2. A clarification of this law occurred when the New Jersey Department of Banking and Insurance (DOBI) went on to address concerns of confidentiality in filings related to how an insurer determined whether to decline or non-renew a risk. "Insureds must be provided with the rationale and the basis for such a determination. Accordingly, an insurer may be called upon to provide a copy of its underwriting rules. In any event, the Department does not believe it appropriate to define by this rule that an insurer's alternate underwriting rules are confidential." See New Jersey Register, 36 N.J. Reg. 1929(a).
Despite the clear right to public inspection of all underwriting rules, in April 2006, in an attempt to bring transparency to the underwriting process, New Jersey Senator Nia Gill requested documents from DOBI, through the New Jersey Open Public Records Act (OPRA), pertaining to the use of occupation and education as underwriting factors by GEICO and other automobile insurance carriers. DOBI, at the time, denied the request, arguing that despite N.J.S.A. 17:29A-46.2, the documents contained proprietary information and would provide an unfair advantage to the insurer's competitors. Failing to resolve the dispute with DOBI, Senator Gill filed a complaint with the Government Records Council. Following a full hearing, the Administrative Law Judge determined that the disputed documents were not underwriting rules and therefore were not subject to public inspection, a decision ultimately upheld by the Appellate Division in an unpublished opinion. Gill v. New Jersey Dept of Banking & Ins., A-1801-10T4, 2013 WL 534786 (App. Div. Feb. 14, 2013).
Amid all this, in 2008, DOBI adopted a new regulation prohibiting the use of "occupation, education or insurance score of the applicant" in acceptance criteria of auto carriers. N.J.A.C. 11:3-8.12. In doing so, they broke the category of "underwriting" into two separate and fictitious buckets of acceptance and rating. As everyone in the insurance industry understands and acknowledges, these are two parts of the same process.
If DOBI 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. Common sense suggests that it makes no practical difference to a consumer if car insurance companies are prohibited to reject you based on your lack of a four-year college degree alone, but they are permitted to charge you 110% more for not having it. That's what I refer to as a "half-pregnant" public policy.
It Begs the Question
Why is this still happening today? I am not alone in asking this question, and it appears those in the position to right this wrong are listening. It's time to cross the finish line and give real meaning to "unfairly discriminatory" by ending these practices.
Reprinted with permission from the September 20, 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, firstname.lastname@example.org or visit www.almreprints.com. NJLJ-09202021-520434