Alliance: Wary Of Credit Score Lawsuit

The Illinois case, titled Hoffman v. State Farm Mutual Automobile Insurance Co., was filed earlier this month in Madison County, a venue with an unhappy history for insurers.

In her complaint in that case, plaintiff Cynthia Hoffman alleged generally that State Farm's practice in the sale and marketing of its insurance policies includes "refusing to issue or renew insurance policies solely on the basis of a credit report in violation of the Illinois Insurance Code."

Specifically, she alleged that State Farm refused to renew her automobile insurance on the basis of her credit score.

Mr. Watts said that Illinois law forbids insurers from taking underwriting action against someone based solely on credit history or a credit score.

While State Farm apparently declined to insure Ms. Hoffman based on both her credit score and her claim history, Mr. Watts noted that the Hoffman complaint calls the claim-history reason a mere "pretext" for taking action based solely on a credit report.

To Mr. Watts, this argument highlights the importance of the case. First, he noted, many state laws similarly prohibit insurers from acting solely on a credit report or a credit score. Second, although the Hoffman case is based only on an Illinois statute, "the 'pretext' argument could be imported to other cases," he said.

At the same time, Mr. Watts suggested that it was necessary to "read between the lines" of the Hoffman complaint.

For example, he noted that Ms. Hoffman claimed to have been a State Farm policyholder from August 1997 to Jan. 29, 2002, and that on March 27 she "renewed her lapsed policy and paid a six-month premium." No explanation is offered for the period of Jan. 30 through March 26.

As Mr. Watts pointed out, when an insurance policy lapses–such as for non-payment of premium–it is technically not "renewed." Instead, a new policy is issued.

Ms. Hoffman claims that after renewing her lapsed policy she received a notice of cancellation from State Farm. She alleged that as a result of State Farm's refusal to insure her again, she had to buy a substitute policy for $1,722.

Mr. Watts thinks that after Ms. Hoffman submitted payment on the lapsed policy, State Farm had a chance to do some underwriting, and to determine that it did not want to insure her anymore, apparently because of both her credit score and auto insurance claims information.

Seeking designation as a class action, the complaint states that the action is initiated on behalf of Ms. Hoffman and "all Illinois residents who had been denied issuance or renewal of an insurance policy solely on the basis of a credit report since Oct. 1, 2001."

Mr. Watts said a similar class action is pending in San Antonio, Texas, against Allstate Insurance.

In the Texas case the lead plaintiff, Juan C. DeHoyos, has claimed that his insurance premium soared because of his credit score.

Mr. DeHoyos alleges that the increase came, even though he allegedly had only two late payments–to companies other than Allstate–on his record and he filed only one claim his entire time with Allstate.

Mr. Watts believes that credit scoring is yet another area of insurance in which attorneys see an opportunity for sizeable class action settlements or verdicts.

As an example of other insurance industry practices that have been targeted in class action litigation, he cited Avery vs. State Farm, which dealt with the use of aftermarket parts to repair damaged vehicles. That case resulted in a $1.2 billion damages award from State Farm, as well as a $6.3 million settlement from Country Companies Insurance Group of Bloomington, Ill.

Mr. Watts particularly noted that Madison County, where the Hoffman suit was filed, has been called a "plaintiff's paradise" because of the propensity of courts there to sympathize with parties seeking redress from large companies or industries.

In fact, a recent article in the Chicago Tribune reported that Madison County is known as a "national mecca for class action lawsuits," with class actions being filed there at a per capita rate that surpasses the national average.

Calls to Ms. Hoffman's attorney, Stephen M. Tillery, of Carr Korein Tillery, St. Louis, Mo. were not returned.