Michigan Insurer Group Sues Over Credit Ban

"Why the commissioner [Linda Watters] would want to exceed her legal authority in a move that will cause rates to increase is beyond me," Mr. Kuhnmuench said.

Not only does the commissioner not have the authority to set rates, Mr. Kuhnmuench stated, but nothing in state law prevents the use of credit as an underwriting tool.

Michigan Office of Financial and Insurance Services (OFIS) spokesman Andy Schor said that state law makes it clear insurers are not allowed to use credit scoring unless they are granted permission by the department.

Personal lines insurers have been using credit scores since 1999. "It has been something of a gray area, but we have decided that since it is unfair we will not allow it," Mr. Schor said.

As for the argument that credit scores are only used to provide discounts, Mr. Schor said "that ignores the fact that they raise the base rate and then they discount it back to customers."

In addition to the credit score ban, the directive put out last October also lowers the base rate insurers will use in their calculation this year, Mr. Schor said.

The IIM filed suit in Barry County Circuit Court, Hastings, Mich., to overturn Ms. Watters' administrative order, which is due to take effect in early April. Under the provisions of the regulation insurers are required to present new rate calculations by May 1 for new and renewed policies after July 1.

In addition to the IIM, plaintiffs in the suit include Farm Bureau General, Hastings Mutual and Progressive Michigan. A ratepayer is also a plaintiff in the case.

According to Lynn Knauf of the Property Casualty Insurers Association of America (PCI), the only states to have banned credit scoring are Hawaii and Michigan. Maryland has banned it for homeowners' policies, while it is, in a sense, banned in California under the terms of Proposition 103 which allows the commissioner to set underwriting criteria.

Yesterday OFIS announced it was issuing its second-annual Credit Scoring Enforcement Survey requiring insurers who use credit scores in ratemaking for private passenger auto and home insurance to certify whether or not they comply with the new regulatory requirements.

OFIS said administrative rules that require companies to roll back base rates and ban the use of insurance credit scores "will take effect in early April…"

The announcement said it "is vitally important for OFIS to obtain this important information to protect consumers until that ban goes into effect."

The information about insurers that use credit scoring or do not will be listed "so consumers can make the choice whether or not to purchase policies from those companies when they are shopping for insurance," Ms. Watters said.