Florida Okays Tough New Credit Score Rule

The new rule, he explained, requires insurers using credit scoring to demonstrate that their method does not have a disproportionate impact on consumers of a certain race, gender, income level and various other classifications.

Tom Gallagher, Florida's chief financial officer, applauded the new rule, which he said will require insurers to demonstrate how they use credit scores when writing or pricing coverage, and that the practice is not unfairly discriminatory.

"There should be a zero-tolerance policy for any information used by insurance companies that impacts your ability to obtain or maintain coverage based on your race, religion, income level, or other discriminatory factors," Mr. Gallagher said.

He noted he had pushed the issue starting in 2001, when he appointed a task force to examine the industry's use of credit reports and credit scores when writing and pricing homeowners and auto coverage.

At that time, he said, half of the top-10 writers of homeowners insurance said they used credit information or credit scores, while nine of the top-10 writers of auto insurance used one or both.

After several public hearings around the state, Mr. Gallagher's task force made a series of recommendations, many of which were included in legislation passed by state lawmakers in 2003.

Mr. Gallagher, who serves in the cabinet, said the rule approved last week is long overdue because the 2003 legislation–Senate Bill 40-A–called for the Office of Insurance Regulation to develop rules to ensure that premiums charged based on credit reports or credit scores were not unfairly discriminatory.

The law–which went into effect on Jan. 1, 2004–prohibits insurers from using a person's credit history against them if they are dealing with unexpected medical bills or the death of a spouse.

It also prohibits insurers from denying coverage or raising rates based solely on a credit report or score. Carriers are prohibited from denying coverage or raising an insured's rates based, in whole or in part, on any of the following factors: the absence of or insufficient credit history, past due medical bills, or place of residence.

Reacting to the cabinet's action, the American Insurance Association said the use of credit information in underwriting and rating Florida homeowner and auto policies is "now threatened."

"While the legislature passed a law in 2003, specifically authorizing the use of credit information for insurance underwriting and rating, today's administrative action by the Florida Cabinet may effectively ban insurers' use of credit information," said Cecil L. Pearce, AIA's vice president for the Southeast Region.

According to AIA, the rule proposed by the Office of Insurance Regulation goes far beyond what other states have done by requiring insurers that use credit information to meet a new "disproportionate effect" standard, which is contrary to both the letter and the intent of state and federal law.

"With this requirement, OIR may have effectively eliminated the use of credit information because insurers do not collect the demographic data necessary to prove that there is no disproportionate effect," Mr. Pearce said.

"While OIR contends that it is protecting consumers with this rule, the reality is they may be denying, at a critical time, the use of a tool that is key to developing a healthy and competitive insurance market in Florida," he added.

According to AIA, using credit information allows insurers to price more accurately, consistently and efficiently, rewarding those who are less likely to have a loss and allowing more consumers to receive appropriate rates, rather than potentially being declined.

AIA noted that although the Florida rule has now been adopted, the substance of the rule is already under review. Several insurance trade associations, including AIA, filed a rules challenge in 2005, and a hearing on the challenge is scheduled for April.