A brief filed by the U.S. Department of Justice in a recent Supreme Court case over the use of credit scores by insurers shows a 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 of Mutual Insurance Companies vice president for public policy Robert Detlefsen, should be viewed as a warning sign for those advocating a greater federal role in insurance regulation.

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

“Though hailed as a victory for insurers, Safeco v. Burr raises troubling questions about the approach that federal officials would bring 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 by the Ninth U.S. Circuit Court of Appeals in San Francisco.

The court decided insurers should provide adverse action notices to any consumer whose rates are adversely affected by their credit score or who does not qualify for an insurer's lowest possible rate. The use of credit scores, he noted, has been attacked by several state insurance departments as potential discrimination against minorities and the poor.

“Knowing this history, it is tempting to read the Ninth Circuit decision as judicial activism–an attempt to eradicate a perceived inequity from the insurance underwriting and pricing system,” he said. “After all, fanciful statutory construction to prohibit or discourage business practices that are contrary to activist judicial value preferences is not unknown in the annals of the Ninth Circuit.”

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

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

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

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

The Dept of Justice also took issue with a claim by GEICO that one of the plaintiff's credit scores was not a factor in the decision 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 a partially 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. Detlefsen said. “At bottom, none of the federal entities that examined this case seem to understand the complex interplay of risk variables that define the insurance underwriting process.”

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

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

The issue is a focus for the industry because of legislation in Congress that would establish an optional federal charter for insurers.

“The legislation would allow insurance companies to choose to be regulated by a single federal regulatory authority instead of the current system of regulation by state governments,” Mr. Detlefsen noted.

However, under the proposed legislation, the federal insurance regulator would be under the authority of the Treasury, rather than the Justice Department.

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