A brief filed by the U.S. Department of Justice in a recentSupreme Court case over the use of credit scores by insurers showsa significant lack of knowledge as to how the industry works,according to an official at an insurance industry group.

That lack of knowledge, according to National Association ofMutual Insurance Companies vice president for public policy RobertDetlefsen, should be viewed as a warning sign for those advocatinga greater federal role in insurance regulation.

His report titled “Safeco v. Burr: How Does Ruling Reflect onFederal Role in Insurance?” examines how the federal governmentunderstands and views the insurance industry as demonstrated in abrief filed in a 2007 Supreme Court case that decided how certainelements of the Fair Credit Reporting Act apply to insurers.

“Though hailed as a victory for insurers, Safeco v. Burr raisestroubling questions about the approach that federal officials wouldbring to insurance regulation,” Mr. Detlefsen said in the report.“For proponents of a federal insurance regulatory regime, Safeco v.Burr should serve as a cautionary tale.”

In the report, Mr. Detlefsen tracks the issue from a ruling bythe Ninth U.S. Circuit Court of Appeals in San Francisco.

The court decided insurers should provide adverse action noticesto any consumer whose rates are adversely affected by their creditscore or who does not qualify for an insurer's lowest possiblerate. The use of credit scores, he noted, has been attacked byseveral state insurance departments as potential discriminationagainst minorities and the poor.

“Knowing this history, it is tempting to read the Ninth Circuitdecision as judicial activism–an attempt to eradicate a perceivedinequity from the insurance underwriting and pricing system,” hesaid. “After all, fanciful statutory construction to prohibit ordiscourage business practices that are contrary to activistjudicial value preferences is not unknown in the annals of theNinth Circuit.”

However, Mr. Detlefsen suggested another reason may exist as thebasis for the ruling.

“It may be, however, that something other than “liberal”judicial bias was behind the Ninth Circuit's dubious constructionof the FCRA's adverse action notice requirement,” he said. “A morecharitable explanation is that Judge [Stephen] Reinhardt and hiscolleagues simply lacked sufficient understanding of the businessof insurance.”

A lack of understanding, he argued, may also be behind what Mr.Detlefsen referred to as an “otherwise unfathomable” decision bythe Justice Department to get involved in the case through afriend-of-the-court brief.

“While agreeing that the defendant insurers did not willfullyviolate the act by failing to send adverse action notices to allbut a relative handful of consumers with impeccable credit reports,the DOJ nevertheless argued that even in the absence of any priordealing, a new applicant for insurance could experience a rate'increase' based on the insurer's use of a credit report,” henoted.

The Dept of Justice also took issue with a claim by GEICO thatone of the plaintiff's credit scores was not a factor in thedecision to raise that plaintiff's rates.

Justice David Souter, in the court's opinion, sided with GEICO,noting that the FCRA would require the credit score be at least apartially determining factor in the decision.

“Justice Souter's analysis of the semantics is surely correct,but even he failed to pinpoint the DOJ's main error,” Mr. Detlefsensaid. “At bottom, none of the federal entities that examined thiscase seem to understand the complex interplay of risk variablesthat define the insurance underwriting process.”

While the high court's ruling on the case was hailed as avictory for insurers, Mr. Detlefsen argues in the study that thebrief exposes a lack of understanding on the part of federalofficials as to how insurance works.

“The case provides a glimpse into how the federal governmentmight go about regulating the business of insurance if it had theauthority to do so,” Mr. Detlefsen wrote.

The issue is a focus for the industry because of legislation inCongress that would establish an optional federal charter forinsurers.

“The legislation would allow insurance companies to choose to beregulated by a single federal regulatory authority instead of thecurrent system of regulation by state governments,” Mr. Detlefsennoted.

However, under the proposed legislation, the federal insuranceregulator would be under the authority of the Treasury, rather thanthe Justice Department.