BALTIMORE, DEC. 17 -- Maryland's insurance commissioner upheld "territorial rating" by car insurance companies today, angering urban car owners, who say the system penalizes them unfairly and illegally.

Affirming a longtime industry practice of charging higher premiums for owners living in congested, accident-prone urban areas like Baltimore and parts of Prince George's County, Insurance Commissioner John A. Donaho said the rating system complies with Maryland law and "is a valid element in rate making."

But urban motorists, led by a coalition of Baltimore interest groups called FAIR (Fair Auto Insurance Rates), said they will appeal Donaho's ruling.

"We will see the Maryland Insurance Commission in court," said President Mary Pat Clarke, who is also president of the Baltimore City Council.

Clarke described Donaho's eight-page ruling as "no more than the {insurance} industry's sweetheart letter to itself, with the commissioner as ghost writer."

Donaho brushed aside the criticism. "It is my sworn duty to conduct this office without fear or favor," he said. " . . . I'm not in anybody's corner."

Insurance industry representatives welcomed the ruling. "I think the commissioner was correct," said August Alegi, a vice president of Geico, which writes insurance policies for 11 percent of Maryland's 3 million drivers. "I think the courts will uphold him."

Donaho's ruling comes after FAIR and other groups challenged territorial rating and Donaho conducted public hearings across the state this year.

The debate centered on a 1973 state law that says "no rate may be based partially or entirely on geographic area itself, as opposed to underlying risk considerations, even though expressed in geographic terms."

The Baltimore coalition contended the law bars territorial rating, but Donaho cited opinions by the state Attorney General's Office in 1977 and 1982 that upheld the practice. Territorial rate distinctions, the opinions said, are lawful if supported by geographic patterns of accident claims.

More claims originate in urban areas than in rural areas, insurance representatives said, justifying higher urban rates. That is so, they said, even though not all accidents in a given area are counted against that area. It depends on who is at fault. For example, if a motorist from Howard County causes an accident in downtown Baltimore, the accident is charged to Howard County, not Baltimore.

FAIR has called for abolition of territorial rating and establishment of the individual motorist's driving record, annual mileage and years of experience as chief criteria in setting rates, a method similar to one approved by referendum in California but blocked by litigation.

Clarke and others contend that higher rates in urban areas unfairly penalize good drivers and make it hard for low-income car owners in cities to buy insurance.

According to a current Insurance Division rate guide, a 20-year-old single man living in the Baltimore-Washington commuter corridor, for example, pays Geico about $1,030 a year, while the same person would pay $1,932 if he lived in Baltimore.