Federal Credit Score Case Unnerves Insurers

By Daniel Hays

NU Online News Service, Oct. 1, 6:11 p.m. EST? A federal judge's light-hearted prose, denying a motion to dismiss a suit accusing Allstate Corp. of using credit scoring to conceal racial discrimination against customers, has become a heavy concern for insurance groups that recently joined the insurer in an appeal.

"This case, if it moved forward, would truly be an assault on state insurance regulation," commented Robert Zeman, a senior vice president with National Association of Independent Insurers, in Des Plaines, Ill.

The suit stirring fears among insurer groups is the prospective class action, DeHoyos v. Allstate, now on appeal before the 5th U.S. Circuit Court in New Orleans. Briefs from the plaintiffs are due in two weeks.

The case was originally filed in U.S. District Court in San Antonio, Texas by a Mexican-American couple from Texas and four African-Americans from Florida.

District Court Judge Fred Biery, whose ruling that the case can proceed is now before the circuit court, said in his playfully worded decision on April 5 that plaintiffs "in this case essentially allege that Caucasians are in good hands with Allstate, but for non-Caucasians it is hands-off."

"The court deduces defendants deny dastardly discriminatory dealings," he wrote.

In a more serious vein, he noted that the complaint alleges that Allstate uses information from credit reports on customers who apply for insurance, and improperly factor this "into a secretive scoring formula" to target non-whites for more expensive policies than "similarly situated Caucasians."

Allstate, in arguing for a dismissal of the case, had cited the federal McCarran-Ferguson Act, which leaves the regulation of insurance to the states, and contended that there are no facts alleged that would indicate they engaged in intentional discrimination.

Allstate noted as well that state laws prohibit discrimination, and that insurance departments in Texas and Florida are both investigating credit scoring use.

However, the judge in his opinion found that courts "have consistently rejected the McCarran-Ferguson Act defense in race-based discrimination cases despite comprehensive state regulatory schemes and laws prohibiting discrimination in insurance."

Judge Biery's decision also noted that the insurer had not cited "any law, regulation or decision in Texas or Florida requiring the challenged credit-scoring system, condoning this practice, committing to insurers all decisions about credit-scoring, or holding that his credit-scoring system does not violate state law."

Allstate filed its brief with 5th Circuit on Sept. 11 and insurance trade groups filed on Sept. 18.

NAII's Mr. Zeman said the case could threaten the ability of insurers to use credit information "that is specifically allowed by the Fair Credit Reporting Act." He said insurers recognize that credit reporting "in the minds of some" is controversial, but "the real deal on credit is that it has been proven a valid predictor of loss."

Joining Mr. Zeman's group in a friend-of-the-court brief are the Alliance of American Insurers, the American Insurance Association, the National Association of Mutual Insurance Companies, and the Reinsurance Association of America.

Jack Drake, a partner in Whatley Drake in Birmingham, Ala., which is representing Texas plaintiffs, said looking at the number of parties filing friend-of-the-court briefs, "you would think the ramifications [of the case] are pretty widespread."

He noted that the 5th Circuit Court is one of 11 circuit courts, with its decisions limited to Louisiana, Mississippi and Texas. "On the other hand, a decision by one court can change what goes on in the nation," he said. The credit issue, Mr. Drake added, "is a widespread problem that affects a great many people."

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Federal Credit Score Case Unnerves Insurers

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