After nearly a year of hearings and study, state Insurance Commissioner John A. Donaho today ruled that territorial rating, the practice that allows insurance companies to base rates on where a driver lives, is legal and has a valid foundation.

Territorial rating has been a hot issue because of the disparity in rates among Baltimore and other parts of the state.

For instance, State Farm Fire & Casualty Co., the state's largest auto insurer, charges a 20-year-old single man in Baltimore $2,345 annually while the same man pays only $904 per year if he lives on the Eastern Shore, according to a rate guide published by the state.

Donaho's decision sparked calls for him to be fired.

"I want him [Gov. William Donald Schaefer] to clean sweep the Insurance Division," said Baltimore City Council President Mary Pat Clarke, the head of Baltimore Fair Auto Insurance Rates, a consumer group that is fighting territorial rating.

"I don't think we got a fair hearing and he has wasted a year of Baltimore city's time," she said.

Clarke said her group will challenge today's ruling in court as well as press for replacement of officials at the Insurance Division and the creation of a position to represent insurance customers. "I don't want another group of insurance favorites put in there," she said.

Clarke's call to fire Donaho was echoed by Sen. John A. Pica Jr., D-Baltimore.

In a letter sent to Schaefer today, Pica urged the governor to dismiss Donaho immediately. "We can no longer tolerate an insurance commissioner's office which totally ignores the legitimate plea of the citizens of Baltimore," Pica wrote.

Donaho made his decision after six public hearings around the state; an actuarial review of insurance rates by Tillinghast, an Arlington, Va. consulting firm; and confirmation from the state Attorney General's office of past insurance opinions. The first public hearings were held last January.

Besides approving territorial rating, Donaho also ordered all insurance companies to submit plans on how they intend to make their policies available to all Marylanders. That was done because of consumer complaints that some insurance companies do not offer coverage in certain areas.

One of the central arguments opponents of territorial rating make is that it is illegal under a 1973 state law that reads: "No rate may be based partially or entirely on geographic area itself, as opposed to underlying risk consideration, even though expressed in geographic terms."

Donaho found those arguments "meritless," based on opinions by the attorney general in 1977 and 1982 that were reaffirmed by the office on Nov. 26.

Because of these opinions, "I do not have the authority to disapprove rating plans which incorporate territorial classification if they are actuarially justified," Donaho said.

However, Clarke, who has contended the 1973 law forbids territorial rating, disputed Donaho's assertion that the attorney general's office had reaffirmed previous opinions. She said she based that on her own conversations state Attorney General Joseph Curran, who was not available for comment.

In addition to the legal question, Donaho said territorial rating was a logical system for assigning premiums, noting that the frequency of claims in Baltimore is 47 for every 1,000 vehicles covered compared to 14.28 for every 1,000 vehicles for rural areas.

However, Donaho recognized that his decision would not be popular with city residents.

"They may be quite unhappy," Donaho said. But noting that prohibiting territorial rating would raise rates for people outside the city, he said those non-city residents "will probably breathe a sigh of relief."

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