Federal Court Orders Credit Score Notices

Washington

A federal appeals court has ruled that the Fair Credit Reporting Act requires customers be given notice when an insurer charges them a higher rate based on their credit record.

The requirement applies regardless of whether it is a first rate or a renewal rate quote, according to the 9th U.S. Circuit Court of Appeals, based in San Francisco.

Furthermore, the decision by a three-judge panel said that under certain circumstances, failure to make such a disclosure is a "willful" violation of the law, allowing a consumer to sue for damages if they can prove they were not properly informed.

However, the case does not apply to California, where under state law credit scores cannot be used by insurance companies.

The cases directly decided by the court involve The Hartford and GEICO, but the decision also reinstated complaints against Farmers Insurance Co., State Farm and Safeco, according to one of the lawyers in the case–Steve Larson of Stoll Stoll Berne Lokting & Schlacter PC in Portland, Ore.

"We were pleased with the court's decision," Mr. Larson said. "We believe it is correct and we think it is important for consumers."

Insurers disagreed. Julie Gackenbach, assistant vice president of government relations at the Property Casualty Insurers Association of America, said the decision "is exceedingly broad in scope and could have negative implications for insurers and their policyholders across the nation."

She added that "a reading of the 9th Circuit decision could result in the issuance of an adverse-action notice in the vast majority of insurance transactions, which was clearly not in the spirit of the FCRA."

Robert Detlefsen, public policy director for the National Association of Mutual Insurance Companies, added that because "adverse-action notifications will have to be sent to many more people," the cost of the burden "will fall disproportionately on small and medium-sized companies."

"Even though credit scoring has proven to be a valuable underwriting tool, some smaller insurance companies may re-evaluate their use of credit scores given the increased cost," according to Mr. Detlefsen.

"This decision is a very extreme outcome that has the court making law and regulations instead of applying it as Congress wrote the law and as Congress and the Federal Trade Commission should be engaged in applying it," said David Snyder, assistant general counsel at the American Insurance Association.

Mr. Snyder said the decision not only reversed the ruling of the lower courts, but that the court's interpretation of the relevant law–the Fair Credit Reporting Act–also imposed new and unfair burdens on insurers.

The AIA noted that the court mandated a notice be issued even when a consumer with no credit history, and thus a neutral credit score, is issued a policy. "This is an area where normally a regulatory agency would determine the rules of play after notice-and-comment rulemaking," Mr. Snyder said.

The AIA also took issue with the court's determination of what constituted a "willful violation" of credit laws, and how it applied that determination to the case. In determining what constitutes a "willful violation," Mr. Snyder said that the court "adopted a questionable standard and went on to apply it in an unfair manner against companies that had interpreted the law exactly as did the lower court."

Given the drastic implications of the court's decision, Mr. Snyder said the AIA would "strongly support any of the parties seeking whatever review is available to them."

However, Robert Hunter, director of insurance for the Consumer Federation of America, called the ruling "a great decision. We're very pleased. It is about time that some low-income and minority people are protected. We are very grateful."

A representative for The Hartford said that because the decision has just been issued, "we must review it carefully before we would have any comment."

GEICO's legal department responded by saying: "We believe that our practices are proper and we intend to appeal this decision." Robert D. Allen, a lawyer for GEICO with Baker and McKenzie in Dallas, added: "We're mulling over all of our options."

These options include seeking review by the full 9th Circuit Court or seeking review by the U.S. Supreme Court. "All legal and practical avenues will be explored," Mr. Allen said.

Mr. Larson said that when the cases return to federal district court in Portland for further proceedings, he will seek class-action status for all of them. He said that now that the cases have been reinstated, the law authorizes consumers to seek damages of between $100 and $1,000 per person, plus attorney's fees, if a "willful" violation of nondisclosure has been determined.

The insurance companies committed "willful" violations of the disclosure provision by their "exceedingly narrow interpretations of their obligations." according to the ruling.

The court said also that the insurers' interpretation of the law "was not reasonable," adding that: "Relying on reasoning that was objectively unmeritorious, these companies sought to benefit from the privilege of using consumers' private credit information and yet be free of the attendant obligations."

The case, Reynolds vs. Hartford Financial Services Inc., No. 03-35695, was noted by the three-judge panel as one of "first impression"–in other words, the first time a federal appeals court has interpreted the definition of "adverse action" in the law.

The extent to which insurers can use credit reports in determining rates for personal lines insurance products has been debated on both the national level and within each state. The National Association of Insurance Commissioners has also dealt with the issue a number of times.

In this case, FCRA, a federal law enacted in the 1970s, was being interpreted by the court. FCRA was last amended in 2003 by Congress when a provision was added allowing consumers to ask for a free copy of the credit report on which a less-than-optimum rate for auto and homeowners' insurance was based.

The essence of the decision was voiced by the appeals court panel when it said, "Hartford Fire's contention that FCRA does not apply to the rate charged in initial insurance policies would seriously undermine Congress's clear purpose."

The panel explained that: "The use of credit reports to help determine the rates to be charged for initial insurance policies is common. Moreover, it is these policies that the economically unsophisticated are most likely to purchase. Congress did not create such strong protections for consumers only to render them inapplicable in so critical a circumstance. Furthermore, as FCRA is a consumer protection statute, we must construe it so as to further its objectives."

The majority opinion of the three-judge panel was written by Judge Stephen Reinhardt. Judge Jay Bybee dissented on the issue of whether the insurers "willfully" violated FCRA by failing to provide the notices in the cases brought before the court, saying the lower court should determine based on the facts whether The Hartford and GEICO's actions constituted willful violation, not on the basis of "lawyers' arguments on appeal."

Caption==credit card pix

Credit scoring could wind up being more of a burden for insurers than it's worth if a court ruling exposing carriers to lawsuits stands.

Callout:

"Even though credit scoring has proven to be a valuable underwriting tool, some smaller insurance companies may re-evaluate their use of credit scores given the increased cost," according to NAMIC.