Beyond Discrimination: Racial Inequality in a Post-Racist Era

Chapter 9. The Ghetto Tax: Auto Insurance, Postal Code Profiling, and the Hidden History of Wealth Transfer

277 Chapter 9    The Ghetto Tax: Auto Insurance, Postal Code Profiling, and the Hidden History of Wealth Transfer Devin Fergus ZIP-­ code profiling in insurance has been one of the most tenacious forms of discrimination. For decades good drivers in Black residential neighborhoods have been charged more. Basic economic fairness should mean that my driving record, not my ZIP code, would shape [my] premium. This history of economic discrimination must end, and the new regulation [Proposition 103] is a long-­ overdue step in that direction. —James Lawson, SCLC of Greater Los Angeles In the recent health care debate, President Obama and his conservative critics such as George Will found rare common ground by appropriating auto insurance as the model for health insurance, whose reform the president called “key to turning around the economy” (Associated Press 2009). For African American and Latino consumers, however, holding up auto insurance as a triumph is a deeply troubling rewriting of history, one that buries from public memory the hidden consumer tax inner-­ city and inner-­ ring city motorists—disproportionately female, African American, and Latino—have paid since the 1970s, when auto insurance became mandatory in most states. This hidden consumer tax totals as much as $20,000 over the driving span of a typical urban motorist.1 A part of a larger “ghetto tax,” auto insurance rates are primarily based on one’s postal or ZIP code rather than one’s driving record.2 In California, for example, millions of urban motorists pay higher premiums to insurers than nonurban motorists with the same driving record. Collecting reve- 278    Beyond Discrimination nues from urban drivers, auto insurers such as California’s largest, State Farm, effectively passed these savings on, in the form of lower rates, to suburban and exurban drivers. This form of redlining (a term appearing regularly in the trade publication National Underwriter) costs urban drivers millions each year. Although insurers insisted their postal code calculus was color blind, no one denied the disparate racial impact of these policies. As a result, California motorists living in mostly black or Latino neighborhoods are typically charged substantially more for the same amount of auto insurance provided to drivers from white communities. Car insurance in black neighborhoods, for example, costs 37.5 to 83.5 percent more than in communities populated primarily by non-­ Latino whites. In real dollars, the biggest auto insurers charge a good driver an additional $537 to $974 per year for moving from a mostly white to a black neighborhood. Similar subsidies exist in the more populous Northeast, where drivers with inner-­ city ZIP codes typically pay as much as $400 more each year than similar suburban drivers. As insurers profiled drivers by postal code, in what I term PC profiling, they effectively contributed to the redistribution of wealth in California and nationally. In California alone, in 2006, urban motorists living in middle-­and lower-­ income communities paid the state’s largest auto insurer, State Farm, approximately $204 million more in auto premiums—a subsidy then passed on in the form of reduced insurance rates to individual motorists living in wealthier neighborhoods with equal or worse driving records (Consumers Union 2006b). This chapter examines how auto insurance serves as one example of the hidden, taxes-­ in-­ kind that have driven racial wealth disparity in recent decades.3 Required by law but provided exclusively by the private sector on a for-­ profit basis, auto insurance is often a forgotten piece in the financial puzzle of the wealth gap. My analysis of Proposition 103, an effort in California to control rising insurance costs, interweaves key themes introduced in this volume, including the limits of individualism, postracialism, and the ongoing explanatory power of racial discrimination as a causal factor in the persistence of the racial wealth gap. As is shown in chapter 5 in this volume by Dorian Warren, who excavates the chronic underemployment and unemployment experienced by Latinos and African Americans, labor markets serve as an important driver of racial inequality. By focusing on expenses or consumption, rather than employment and income, my chapter, similar to Oyo Kwate’s, also in this volume (chap. 11), balances the political economic ledger. It does this by providing an inside view of the color-­ blind mechanisms that perpetuate discrimination in auto insurance pricing, uncovering how even race-­ neutral policies in consumer pricing extracts financial resources from communities of color and thus exacerbates the ra- The Ghetto...