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SAN FRANCISCO – A state appeals court ruled late Friday that auto insurers can calculate premiums based on where a customer lives, setting the stage for a potential California Supreme Court showdown. 

The decision from the 1st District Court of Appeal in San Francisco nullified key provisions of Proposition 103. That 1988 initiative required auto insurers to base prices on a driver’s safety record, years of experience and number of miles driven. The initiative did also allow insurers to consider ZIP code as an “optional,” subordinate factor. 

The three-judge court agreed with insurers who said they needed to give significant weight to a customer’s ZIP code because risk factors varied from area to area, affecting the price of a policy. 

“Territory is a more important determinant of the risk of loss than any other single factor,” Justice Daniel M. Hanlon wrote in overturning a lower court’s decision. 

Consumer groups have mounted a long-standing challenge to potentially discriminatory pricing practices by insurers. The Foundation for Taxpayer and Consumer Rights, which sponsored Proposition 103, said it would appeal to the California Supreme Court. 

“The court strayed from the law approved by voters and made its judgment based on endorsing an economic scheme that insurers have used for decades to discriminate against good drivers in bad ZIP codes,” said foundation President Harvey Rosenfield. 

In court papers, consumer groups pointed out the case of a woman with 27 years of driving experience living in the Los Angeles suburb of Pacoima. She would pay a $772 annual premiums, they said, compared to $281 if she lived in San Luis Obispo. Her premium is 63 percent higher solely because of her ZIP code. 

The insurance industry said there’s a good reason for charging higher premiums based on where drivers live. Drivers in San Francisco, Oakland and Los Angeles, for example, pay more because it costs more to insure motorists in high-crime and high-accident areas. 

Without basing rates on ZIP codes, rates for good drivers in remote counties would go up to subsidize premiums for good drivers in metropolitan areas, the industry argued to the court in September. 

“What’s going to happen, in most counties in California, rates are going to go up,” Vanessa Wells, a State Farm Insurance Co. lawyer told the court. 

Premiums based on ZIP codes were allowed under 1996 regulations from then-Insurance Commissioner Chuck Quackenbush. Legislation to repeal the rule was defeated that year. 

Two years ago, an Alameda County judge ruled that premiums based largely on ZIP codes were illegal. Quackenbush appealed. 

Quackenbush resigned this year amid allegations he let insurers avoid billions in fines after the 1994 Los Angeles earthquake by allowing them to donate far less money to a nonprofit fund he is accused of misusing. He was replaced by Harry Low. 

The case is Spanish Speaking Citizens’ Foundation Inc. vs. Low, A084024.